Mr. Ed Sibley:

I thank the Chairman and members for the invitation to discuss the Central Bank’s views on the Bill. I am joined by Gráinne McEvoy, director of consumer protection and Vasileios Madouros, director of financial stability.

The Central Bank serves the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy. We treat the dual arms of our mandate – safeguarding stability and consumer protection – with equal weight. Our work in each domain is mutually reinforcing.

Over the past decade, the Central Bank has proactively worked in conjunction with the Oireachtas, the Government, State agencies and international counterparts to strengthen the solvency and stability of the financial sector and enhance protections for consumers. We believe that a strong consumer protection framework is essential. This is particularly the case for mortgage borrowers as a mortgage is the most significant financial commitment for most families and individuals.

That is precisely why we advocated for a legislative regime whereby borrowers would be protected regardless of whether their loan was held by a bank or a non-bank. This is now the case. Customers whose loans are sold to another firm maintain the same regulatory protections they had prior to the sale, including under the various statutory codes of conduct issued by the Central Bank. Firms must comply with these codes by law. This includes the code of conduct on mortgage arrears, CCMA, which was put in place in 2009 to ensure the fair and transparent treatment of financially distressed borrowers. The CCMA includes requirements that arrangements be sustainable and based on a full assessment of the individual circumstances of the borrower and that repossession be used only as a last resort. Firms must also follow the mortgage arrears resolution process when dealing with borrowers facing arrears.

There is significant support within the broader Irish consumer protection framework for those in arrears, including the Money Advice and Budgeting Service, MABS, the national mortgage arrears resolution service, the personal insolvency regime and a court mentor service. Collectively, these protections have kept the vast majority of distressed borrowers in their homes in spite of the scale of mortgage arrears experienced following the financial crisis.

At the end of 2018, fewer than one in 16 mortgages relating to private dwelling homes was in arrears of more than 90 days.

In 2018, there were 22,000 new restructure arrangements for mortgages relating to private dwelling homes. This brings the total number of private dwelling homes loans categorised as restructured to more than 110,000. In addition, more than 3,000 distressed borrowers have secured personal insolvency arrangements, which return borrowers to solvency, while keeping them in their home in more than 95% of cases .

The enactment of the Bill will not offer new or existing borrowers additional regulatory consumer protection and it could have negative consequences for the functioning of the mortgage market, with wider implications for all mortgage borrowers. Its enactment in its current form would hamper the ability of banks to access market-based sources of financing using mortgages as collateral, such as securitisations and covered bonds. Access to such forms of finance helps diversify the funding base and achieve lower funding costs relative to issuing unsecured bonds. Constraints on the ability to mobilise mortgages as collateral to raise funding through these market-based channels could ultimately limit the availability of mortgage credit or increase its cost. At a time the severe dysfunction in the mortgage market is finally easing, the Bill could unintentionally slow or even reverse that progress. It would certainly give further pause for thought for any firm considering entering the market as it would increase the cost of doing business in Ireland and effectively limit the funding available for mortgage lending. We do not believe this is in the interests of current and future mortgage borrowers.

During the financial crisis, the ability of Irish banks to post securitisations and covered bonds as collateral was crucial to allow them to borrow from the eurosystem to meet their acute liquidity needs. Total monetary policy lending provided to Irish-domiciled banks rose to a high of €140 billion towards the end of 2010, of which approximately 40% was collateralised by mortgage-related securities. The Bill would render the type of asset transfers required to use these instruments effectively impossible. The euro system would have concerns about the realisation of such collateral in the event of a counterparty default. This, in turn, has the potential to restrict the capacity of Irish banks to access central bank funding.

If banks cannot mobilise collateral quickly in times of financial stress, crises can get worse very quickly. Although the Bill makes an exception for failing or likely to fail banks, this is not sufficient. If banks are close to the point where they are deemed failing or likely to fail, they are likely to have taken actions, such as reducing the availability of credit, that will have harmed the economy. The entire focus of the resilience changes made over the past decade has been to try to prevent banks getting into a situation where they are failing or likely to fail, precisely to guard against the kind of events that trigger damage to the system, businesses, households and consumers.

The financial crisis serves as a stark reminder of the severe costs of financial instability to society as a whole. Although there has been significant progress towards repairing the banking system, legacy vulnerabilities remain. The restrictions imposed by the Bill would reduce the ability of the banking system to absorb future shocks. Ultimately, these costs would be faced by households and businesses in Ireland.

Over the past decade, much work has been undertaken to enhance the resilience of the banking system, including increasing capital, reducing non-performing loans, NPLs, and making funding sources more stable. We continue to expect banks to use a full toolkit to reduce NPLs. The ability to sell portfolios while ensuring full compliance with statutory consumer protections is important. Since the 2013 peak, the stock of NPLs held by the retail banks has declined by €67 billion. Approximately 12% of that reduction was achieved through residential loan portfolio sales.

In our view, the introduction of the Bill would significantly constrain the ability of banks to engage in portfolio sales and, thus, limit their ability to deal with outstanding vulnerabilities from the crisis. These constraints would hinder the continued post-crisis recovery of the system and, crucially, reduce the ability of the banking system to deal with any future macroeconomic downturn and deterioration in asset quality. Put simply, this means the banking system would be more likely to be impaired in times of stress and less capable of supplying credit to households and businesses.

As the Governor of the Central Bank noted at the meeting of this committee on March 26, the Central Bank has grave concerns about the Bill, given its far-reaching implications for the operation of the banking system and for consumers. Although designed to give effect to a voluntary code dating from 1991, the regulated financial services sector has changed fundamentally in the intervening three decades, and consumer protection has been significantly strengthened. The voluntary code has been superseded by statutory codes of conduct and strong and wide-ranging regulatory powers which are underpinned by intrusive supervision. As such, our view is that the Bill will not offer borrowers any additional regulatory consumer protection; rather, it could have significant unintended consequences to the longer-term detriment of all borrowers.

In that respect, we concur with the ECB's view that the Bill, at a minimum, should undergo a thorough impact assessment to ensure it is in the best interests of consumers as a whole.