Dr. Constantin Gurdgiev:

I mentioned in my statement that the banks across the eurozone, including in Ireland, are certainly incentivised under quantitative easing to take longer-term funding because it is made significantly cheaper. However, the overall cost of funding for the banks has declined dramatically and QE has a direct effect on that in terms of flattening the U-curve. In other words, the cost of borrowing in the longer term and the shorter term has declined. The banks are not passing that on to the borrowers at a retail level, that is, to companies and to households for consumer credit or any other credit.

We are at very strong margins. In other words, the margin between what banks can effectively borrow money in interbank markets and what they charge for new loans is very significant. This has nothing to do with the legacy loans. It is only used by the banks to subsidise some loans, including tracker loans, etc. However, this is a consistent policy we have pursued in repairing the banking sector. In the regional 2010-2011 plans for reconstruction of the banking sector, the uplift in lending margin is the second pillar of the whole restructuring of the banking sector in this country.

My concern is that we are already in a fairly expensive environment of borrowing with historically low rates at the government level and at the policy level, and with near historically low rates in interbank markets. These rates are not being passed through. However, when these rates are rising the banks have not repaired themselves sufficiently to allow for that margin to shrink, so the margin will stay up as the base rates are rising and as a result the charge will rise.