Oireachtas Joint and Select Committees

Wednesday, 26 November 2014

Joint Oireachtas Committee on Finance, Public Expenditure and Reform

Overview of Banking Sector: Central Bank

2:00 pm

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I welcome Professor Honohan, Governor of the Central Bank. He appeared before the committee on 30 April and we are pleased to welcome him back. The format of the meeting will see him making some remarks, which will be followed by a questions and answers session. I remind members, witnesses and those in the public gallery that all mobile telephones must be switched off.
I wish to advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
I invite Professor Honohan to begin his contribution.

Professor Patrick Honohan:

I thank the committee for inviting me back to bring it up to date. It laid out a number of issues. There have been quite a few significant developments since I last addressed members, too many to summarise fully in a short introductory statement. As such, I will concentrate on a select few.

The reduction of two further steps in the European Central Bank's main policy interest rate has had a complicating influence on financing conditions in Ireland. On balance, the positives for Ireland clearly outweigh the negatives, not least to the extent that the ECB expansionary policy will help boost economic demand in the euro area as a whole in the course of bringing inflation back to the bank's target. Irish borrowers on tracker mortgages have seen these further interest rate reductions fully passed on to them, continuing and reinforcing an exceptionally lengthy period of ultra-low interest rates that has helped these borrowers. However, because of the impact on tracker mortgages, the lower ECB rates have not directly improved the banks' profitability, because the average and marginal cost of bank funds has not fallen as much. The banks' drive to restore their profitability combined with a lack of sufficient new competition has meant that, far from lowering their standard variable rates in the past three years as ECB rates have fallen, they have, as is well known, increased their standard variable rates somewhat.

I have distributed to the committee members figures and data which show a simple bank-by-bank average of the advertised standard variable rates for an 80% loan-to-value mortgage. I am distributing these numbers because this trend is not evident from the traditional interest rate series as published by the Central Bank in line with international standards. We have been working on the assembly of additional statistical series on mortgage interest rates on a rigorous basis. They are relevant to the question of how much it costs someone on a standard variable rate. We expect to publish these data from January 2015. The data indicate that the standard variable rates borrowers are paying are still less than they were before the crisis but not by all that much. A widening of mortgage interest rate spreads over policy rates also occurred in the United Kingdom and in many euro area countries after the crisis but spreads have begun to narrow in the UK and elsewhere. Until recently, bank competition has been too weak in Ireland to result in any substantial inroads on rates.

What is the role of the Central Bank in the area of mortgage interest rates? From a prudential point of view, we could have a role in seeking to ensure that banks set rates on new business sufficiently high to cover the risks of future default. While the current spreads would not have been sufficient to compensate the banks for the risks they actually took during the boom - much of this risk is still embedded in the existing stock of mortgages - it would be hard to argue that mortgage underwriting today is so bad as to require such a high margin on new business. However, that is not the way standard variable rates work. They work out more or less the same for new and existing arrangements. Constrained by their inability to restore spreads on tracker mortgages - they are negative in many cases - the banks have sought all means to restore their profitability, including the widening of standard variable rate spreads. As I have said, these typically apply to old as well as new business.

As in all advanced economies, in Ireland it has long been understood that tight administrative control over the rates charged by banks would be counter-productive in ensuring a sufficient flow of property price credit on a lasting basis. For one thing, such control would strongly discourage new entrants. Therefore, while interest rate spreads are now high I need not remind the committee that since national credit policy is crafted with the welfare of the people as a whole as the constant and predominant aim, I see no sufficient basis for altering this view. Of course, the Central Bank does not have the power to set those rates, but that is a policy view.

There has been much discussion of the Central Bank's consultation paper on macro prudential instruments and the limits proposed on high loan-to-value and loan-to-income mortgages. The consultation period ends on 8 December and we hope to be able to announce a finalised set of regulations soon after that date, depending on the complexity of the responses received. It may be asked whether the Central Bank believes that recent property market developments represent a bubble. That is not specifically the driver of these proposals. Instead, through these measures we want to have in place a standing regime which ensures that a credit-driven bubble does not take hold and that a new generation does not become over-indebted. We should consider what would happen in the absence of such a regime. There have been sharp price rises in Dublin. According to the figures published today by the Central Statistics Office, they jumped by 42% in only 18 months. This is a thin market and the rises have not yet elicited a sufficient supply response. It could sow the seeds of trouble for the future. Our approach seeks to draw on ongoing research being carried out at the Central Bank along with international experience and any matters which may emerge in the consultation. We are keen to shorten the period of uncertainty as much as possible. Accordingly, after making any appropriate refinements, for example, I already mentioned in public in respect of first-time buyers the potential future use of private mortgage insurance - this was floated in the consultation paper - we will move quickly to confirm the parameters of the new standing regime.

Almost all of the discussions in which I have participated at this committee in recent years have, naturally, focused on the banks and, in particular, mortgage arrears related to the banks. This is only one element of the Central Bank's mandate. I remind the committee that almost nine out of ten staff of the Central Bank are actually engaged in numerous tasks other than the prudential supervision of banks. The staff deal with other aspects of banking oversight, such as the consumer protection and conduct of business aspects of bank regulation. However, micro prudential banking supervisory decision-making is now largely passed to the control of the European Union Single Supervisory Mechanism, SSM, which came into operation on 4 November. The SSM does not, however, mean less work for those of us in Dublin, rather it means more work inasmuch as the procedures of the SSM require further expansion of our bank supervisory staff as well as a reorganisation of that function.

After three years during which staffing levels of the Central Bank have not risen, the bank now needs to increase staff numbers again not only because of the SSM, but also because of the additional complexity of new international regulations covering non-bank financial services. These are at the heart of the IFSC, an area to which we devote many resources to supervising, albeit this is invisible to the public. There are new rules on bank resolution as well and other new mandates which we have been given.

By the way, much of the cost is recovered from the regulated industry. The industry pays many of the costs and indeed all regulatory costs could be so recovered, instead of eating into the Central Bank's surplus income, which is to be transferred to the Exchequer. The Central Bank has suggested this to successive Governments. I believe it would be a good idea if the industry paid all of the regulatory costs.

Having already absorbed a sizeable increase in staffing during the period 2010-11 when we worked to upscale our operations in response to the crisis, we are currently engaged in an extensive review of our internal organisation to ensure the conditions for steady improvement in the effectiveness of our work. This work relates to essential matters which, especially when they are proceeding well, are not obviously visible to the public. The review is examining a range of issues including internal structures, career paths and internal processes. I expect significant beneficial changes to both organisational structures and practices within the Central Bank as a result of the review. Our effectiveness will be enhanced by our carefully designed and efficient headquarters building at North Wall Quay, the main building contract for which is now out to tender. This will result in bringing together all our non-currency staff, that is to say, all bar the Sandyford staff, into a single location. There are strong financial and practical benefits to the move.

I will not add anything to the lengthy letter on mortgage arrears which I sent to the committee in September providing commentary and responses to the committee's recent report on the mortgage arrears situation. The situation has continued to evolve in line with the indications in that letter. The committee's invitation indicated a wide range of potential topics for discussion today. A wide range of issues come under our remit and I am happy to take any questions and to try to answer them.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I welcome the Governor, Professor Honohan, today. I thank him for his response to the detailed information sought by the committee and his ongoing co-operation. I will begin with the issue of standard variable interest rates for mortgage holders, which the Governor dealt with in the early part of his opening statement. I get the impression from what the Governor said that he believes rates are high. However, the Central Bank is not willing to intervene in the sense since it does not want to be setting interest rates, which is understandable. The Governor said it would be counter-productive to exert administrative control. Does the Governor believe that the variable rates being charged by banks at the moment, which are in the region of 4.5% for new mortgages, are too high?

Professor Patrick Honohan:

There are certainly on the high side.

However, we must ask what we mean by "too high". As the committee was told by the banks that presented to it in the past few weeks, they cannot fund themselves at the ECB policy rate. That is not the way it works, as everyone knows. The 4.5% should not be compared with 0.05% in terms of the cost of funds. Approximately 300 basis points or 3% is the spread over the banks' average cost of funds, although less over their marginal cost of funds. It is a bit on the high side, but not by all that much. We do not have the power to intervene.

I will jump ahead to the question of whether the Oireachtas should consider giving us that power. I would suggest not. In terms of the provision of mortgage credit and the in-flow of banking services into the economy, the confidence around the way banking and the financial system work - I am not referring to national confidence - is not well served by there being tight control over interest rates. In the 1960s to 1980s when a cartel of bankers was setting interest rates subject to some kind of approval by the Minister for Finance and the Central Bank, it was a facade because our control did not influence the rates, which were largely coming in from abroad. It would not be a good idea to introduce a regime of tightly controlled mortgage rates.

However, I would make an exception. The committee will presumably be considering legislation in the near future about the mortgages that are sold to non-banks, ones that are simply harvesting those mortgages without getting involved in new business. It may be that there should be some limitation on the degree to which they could deviate from market practice. What locks the standard variable rate contract into reality is the fact that it should be the rate that is charged by the lender on new and old business, more or less keeping lenders in line with market conditions. However, if an entity is not making new business, it might not have this natural restraint.

2:10 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The 300,000 or so standard variable rate customers in the system whose mortgages are with the main banks are paying an interest rate that the Governor regards as high at 4% to 4.5% in the majority of cases when the banks' cost of funds typically lies between 1% and 2%. The banks are taking advantage of and exploiting those customers. The banks clearly have a major problem with tracker mortgages, on which they are not making much of a profit, if any. They seem to be heaping all of the burden on the variable rate customers and extracting the maximum amount of profits from them.

The Governor is not prepared to seek additional powers to intervene, but has he held discussions with the banks and conveyed to them the views he communicated to us, namely, that the rates are high? If he is not prepared to use hard pressure and seek additional interventionist powers, has he used soft pressure? Has he even raised the issue with the banks?

Professor Patrick Honohan:

They read my public statements and do not hear anything different behind closed doors. I do not interact with them on a weekly basis. That is not the way I work.

We must stand back and see that there are all sorts of strange consequences stemming from the legacy situation. The Deputy may state that standard variable rate mortgage holders are paying more than they would have had there not been a crisis, but tracker mortgage holders are paying a great deal less than they would have as well. The taxpayer is paying a great deal more, too. There are all sorts of winners and losers. I do not see the banks' shareholders, including the State, being big winners in this. Rather, I see the banks moving towards profitability.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Why are the variable rates in Ireland so out of line with the euro area average? Professor Honohan indicated that he would correct the way in which the data on the official retail statistics were presented so as to reflect more accurately the advertised rates that banks were charging customers. Why is it that the euro area average for a mortgage is approximately 2.5% while we are much higher?

Professor Patrick Honohan:

The cost of funds for Irish banks is a great deal higher than it is for banks in Germany, France and so forth.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It is not 2% higher.

Professor Patrick Honohan:

We could discuss an exact comparison. We have seen a large widening in spreads in Spain and Italy, countries that are not doing as well in the markets as Ireland is but which are more comparable with France and Germany. In Britain, spreads widened even more earlier on, but I have noticed in the past nine months or so that the spreads there have started decreasing. I expect to see spreads in Ireland decreasing due to competition as well.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I wish to refer to the Governor's proposed new mortgage rules on the loan-to-value, LTV, and loan-to-income, LTI, ratios. They are out for public consultation. Clearly, some new rules are on the way, whether they are along the exact lines of what has been published or a variation thereof. When will the new rules come into effect?

Professor Patrick Honohan:

As was indicated informally, we would like to get these into effect as soon in the new year as possible. Launching our proposals as soon after the summer as we could, we wanted to have a proper consultation period, which will last until December. I am not sure that we will be able to get them finalised by 1 January, but we are not hanging around.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The main criticism that could be made is that a young couple or person who is starting out and trying to take out a first mortgage to buy a home might pay €300,000, particularly in the Dublin area. At a time when that person is renting in the private market where rents are rising substantially, it is exceptionally difficult to have to save up for a deposit, let alone a 20% one of €60,000. The risk is that the proposal will deny a generation of young people the opportunity of ever owning their own homes. Socially, it is potentially divisive. Some people who come from wealthier backgrounds and have parents who can help them out with deposits will be able to get around the rules. Other people, for example, those from lower socio-economic backgrounds, who do not have that option will have to save as hard as they can, but 20% will be beyond many of them. How would Professor Honohan respond to that?

Professor Patrick Honohan:

Without denying the reality of the situation the Deputy outlined, I would be cautious about seeing easily available mortgage credit as a way of resolving inequality in society. The opposite is the fact. We imitated the experience of the US. Excessive reliance on mortgage credit can create situations in which too many people borrow too much and get into ferocious financial difficulties. We know this, but we have to think about the issue in terms of the future as well. US Senator Elizabeth Warren's writings are informative. The US has so much data on how the entire process has damaged an entire generation.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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My final question in the limited time available to me is on the proposal for a mortgage indemnity guarantee or mortgage insurance. What role could it play in meeting part of the minimum deposit requirement that is being set out by the Central Bank? As soon as the Governor made his proposals public, the Government seemed to float the idea of the mortgage indemnity guarantee, perhaps as a way of circumventing the rules. How does Professor Honohan feel about that? Can such a guarantee play a role in meeting the minimum deposit requirement?

Professor Patrick Honohan:

The Government should be cautious about committing public funds in this area. We are concerned about a systemic risk, namely, that property prices could topple again. A previous Government got involved with an actual guarantee, but we do not want the current one to get involved through an indirect guarantee.

This is what the Government got into in the past with an actual guarantee but we do not want it to get involved in an indirect guarantee through this means. I do not see a Government device being effective here.

2:20 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I do not think that is the intention. I think it will be private.

Professor Patrick Honohan:

If it is to be a private device, again, we must be very careful. As I said, this is a systemic risk and there is a danger that this might be designed badly and could lure in a whole mortgage insurance business which was both costly and not precisely targeted at the risks we are talking about, which might not be the way to go. That is why we consulted on this. We are not yet sure that this is the solution and the best way to go. We have been doing quite a lot of research throughout the year and have continued to do so even since publishing the consultation paper. We must get this right.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I welcome Professor Honohan. The rate that the Central Bank has quoted as being the average rate is 3.47%. However, the standard variable rate available for new business is approximately 4.3%. We are hearing reports that restructured tracker mortgages are included in the Central Bank's figures. Is that correct?

Professor Patrick Honohan:

That is absolutely correct. There is a standard series which has been published for many years - at least 15 - which follows a particular international statistical template. Statisticians are very conservative people. They do not like to change their definitions. We have known for months if not years that this is telling us a certain part of the story and while it is not irrelevant, it is not telling us what most people want to know, namely, what would be the standard variable rate available now if one walked into a bank. I have said this repeatedly and drawn attention to the standard variable rate. The Deputy quotes the figure of 3.47% which is in our publication as the average rate, which includes restructures. In the annexe to the publication, we made sure to include the actual number for new customers, which is 4.51% and not 3.47%. However, 3.47% is not an irrelevant number but is just a number ---

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I take it from what Professor Honohan has just said that in any future publications from the Central Bank, two figures will be given? The first will be based on what the bank regards as the standard norm ---

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Deputy, I must ask you to put your phone away. It is causing problems with the sound system.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The Central Bank will, henceforth, publish a report which will give two elements. The first will be the standard measure, which is an international measure as well the other figure, in this case, 4.51%. In an Irish context, 4.51% is the more appropriate rate to quote.

Professor Patrick Honohan:

For new business, yes, in the context of the standard variable rate.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That is about 2% above the norm in Europe. Why is that the case?

Professor Patrick Honohan:

There are two reasons for that. The first is that the cost of funds is higher and the second is a lack of competition. There is insufficient competition in the market and we are already seeing the effects of that. AIB recently got a reduction and I hope that is the beginning of a trend. My perception is that the decision of RBS to stay in Ireland reflects the fact that it sees a market here that is not being constrained by rates being held down. It sees that there are good profits to be made. That will result in a convergence towards a better rate.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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How do we get competition into the market? We had the principal banks in before this committee last week.

Professor Patrick Honohan:

They do not want competition, I presume.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It is clear, from the way they are pricing, that we almost have a cartel in the first-time buyer market in banking. We do not appear to have effective competition. The Central Bank's role is to regulate banking. Professor Honohan said in a previous presentation that competition is not just about the number of banks in the market but also about the environment. How can we get to a point where we can bring competition into the market? First-time buyers as a group are having difficulties. A report released today by the NESC suggest that many people will be unable to own their own home, something to which many Irish people aspire. What can the Central Bank do, as the regulator, to create an environment in which the existing banks will start to compete with one another, which they are not doing at present, and new entrants will be encouraged to come into the market.

Professor Patrick Honohan:

There have been no new entrants and a number of exits up to now because of the crisis, the lack of confidence, the backlog of unpaid mortgages and so forth. We are working through all of that and rebuilding confidence. That is what has ensured that Ulster Bank stayed here. We are now starting to hear noises that people are interested in entering the mortgage market. The Central Bank is not turning anybody away. The power to license banks is still retained by the Central Bank. We are certainly not discouraging anyone. On the contrary, whenever people look like they are interested in setting up here, we are telling them that we are open for business and that new entrants would be welcome. Tools for encouraging competition are not readily available but we are not creating barriers.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Are there any current applications for a banking licence?

Professor Patrick Honohan:

I do not think so.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In the Governor's opening statement he said that the banks were constrained by their inability to restore spreads on trackers. The banks have sought all means to restore their profitability, including the widening of the standard variable rate spreads which typically apply to old as well as new business. Tracker mortgages are clearly proving very difficult for the banks to deal with in terms of their balance sheets and profitability. In the wider context, is it not incumbent upon the ECB to consider taking tracker mortgages off the balance sheets of the banks that are under pressure? That would improve the banks' balance sheets and could also positively impact on the variable rate mortgages they are offering. The banks would not then be putting these prohibitive rates in place. Given that Professor Honohan is on the board of the ECB, does he not agree that now is the time to put in place such a measure? Professor Honohan agrees that the banks are penalising the standard rate mortgage holders because of their problems with the tracker mortgages.

Professor Patrick Honohan:

It is true that the ECB has started to buy bundles of mortgages. The problem is that it buys mortgages at the market price and the value of those tracker mortgages is not particularly high because they are yielding only 1% or less. The formula that the market works with and the formula under which the ECB will buy them out does not make it attractive to the banks to sell because they will be no better off or, at best, only a little bit better off. They will make their judgments on it and possibly sell. They have sold some, but only a very small number.

The Deputy has asked if there could be a big deal, something special, for the Irish banks. Officials at the Department of Finance and at the Central Bank worked with the troika, including the ECB, for months, to try to come up with some device for the tracker mortgages which would be acceptable. The best plans that we came up with would involve getting the agreement of the ECB as well as all of the national parliaments. A judgment was made that the gain to the banks was not sufficient, even with the best-designed scheme available. If someone wanted to give us a gift and just take them that would be fine but we know that is not going to happen.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Could Professor Honohan come up with a blended type of offer to the ECB which would involve the banks' holdings of Government bonds?

It is clear to any observer that there is a difficulty with tracker mortgages. For each bank, they make up a different percentage of their mortgage book. Interestingly, Permanent TSB's percentage, contrary to perception, is lower than that of its competitors. I am looking at this issue from the perspective of the consumer in that it is clearly proving a major impediment to the objective of restoring the banks as properly functioning institutions that can compete when it comes to standard variable rates. Are any discussions taking place with a view to coming up with some type of blended solution? There is an onus on the European Central Bank to assist us in this measure and find a solution that is creative and will work. Is this an issue on which the Central Bank is engaging or intends to engage with the ECB?

2:30 pm

Professor Patrick Honohan:

This issue is paused. We worked as hard as we could on designing something that would fit with the political appetite in Europe. It is not just a question of satisfying the ECB; this is an issue that comes into the political arena. Moreover, the ECB itself is constrained in that it cannot do giveaways.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does the Governor remain of the view that a policy of moving tracker mortgages off the Irish banks' books would be helpful?

Professor Patrick Honohan:

It is a good idea, but I am not saying it is a runner because I do not see movement on it at the moment.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does Professor Honohan see logic in it?

Professor Patrick Honohan:

I see logic in it but I do not see movement on it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Cuirim fáilte roimh Professor Honohan. I will begin with a question on an issue that is currently receiving attention in the media. Was the Governor consulted regarding the release by a senior board member of the ECB of the Trichet letters and, if so, was it the first time he was so consulted? Will he indicate his view on the release of those letters?

Professor Patrick Honohan:

I am not meant to say what happens in these instances but in this case it is fairly obvious. In the first instance, the idea of a letter was discussed by the governing council and I participated in that discussion way back then. I did not think it was a terribly good idea to send such a letter, but it was sent. I did not see a draft of the letter before it was sent; I saw it when it arrived.

Regarding more recent events, I participated in discussions on the matter and was strongly in favour of releasing the letters. I am generally strongly in favour of releasing things unless there is a good reason not to.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I appreciate that. The banking inquiry has proceeded to part two and I am sure those matters will be dealt with in more detail there.

My next question relates to the shape of Irish banking at this time. Despite being so far into the crisis, we do not yet have a good, functional banking system. There are question marks over Permanent TSB, with its restructuring plan having been knocked back twice. I understand a new plan has been entered into. In regard to standard variable rates, Professor Honohan has asserted that they are overpriced for new customers. There are question marks, too, in regard to lending to the market, trying to appeal to new entrants and creating competitiveness. Where does the Governor see the banking structure in the medium term?

Professor Patrick Honohan:

It is true that the banks are spending a disproportionate amount of their time relative to any other banking system in mopping up and dealing with legacy issues. It is taking a long time to get there, as we have many times discussed. This is largely the reason that they are not functioning progressively as part of a normal banking system. It is not just the banks themselves but their customers as well. We all agree that banks should be lending to small businesses, but we must consider who are the owners of those businesses. In many instances, they are owned by families whose finances are in disarray because of mortgages and other things. Moving forward involves fixing the backbone. This is why we have not been able to arrive at a situation where we have three, four or five clean, new banks working holistically. We have looked at ways of achieving that, but the bottom line is that yesterday's customers are tomorrow's customers.

The Deputy asked about the medium-term perspective. My dream for a long time has been for a cross-Europe banking system with banks that have a presence right across Europe. Unfortunately, that dream does not seem anywhere near being realised. I can envisage our banks being owned by a large international bank - at one stage, one might have imagined it being the other way around - and in just the same way as we use Microsoft and Google, we would use the services of an international bank. That type of set-up would have separated all the problems of linkages between the Irish Government's issues with debt and would allow us to be on a level playing field with everybody else. However, the appetite of international banks for getting involved in peripheral countries or in any cross-border activities has been dampened by their own problems. The large international banks have been under pressure to raise capital. We think we are the only country that lost money in the banking crisis, but they lost money too. None of this is happening but it is where I would like to see us going. I have no difficulty with Irish-owned banks, but I would like to see a backbone in the Irish system of strong international banks. What we have had, on the contrary, is major international banks retreating. Lloyds is gone, for example, but, fortunately, RBS is still here in the form of Ulster Bank.

All of that is one dimension, but there is another dimension to consider. I have spoken about this before and a copy of a speech I gave a year ago or so was circulated to the committee as a background document. There should be a second tier of banking which is geared more towards local concerns, with local managers and a greater level of local awareness. This would be on a scale larger than the credit unions. They could be the nucleus of it, but the credit unions as they stand are too small individually to be really effective suppliers of services. This is all a long-term vision. The entry of large international banks into the Irish system does not seem to be coming down the tracks, although these things can change. I am sure that when they start to invest in peripheral countries again, Ireland will be among the first they look to because they are impressed by the ability of the Irish economy to adjust and react. They will be impressed that the Irish people, despite all the pressures, have recognised that we all must pull our weight. That is what they have done.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What Professor Honohan is saying is interesting. There are suggestions that AIB might be moving in the direction of being sold to a larger multinational bank. The Governor seems to be indicating that he would support a type of Irish Sparkassen along the lines of the German model. I understand there is a lot of work being done by different groups here to tease out that possibility.

Professor Honohan mentioned that regulatory costs could be recovered by the State. What type of benefit does he envisage for the Exchequer? What are the regulatory costs the Central Bank is incurring at this time?

Professor Patrick Honohan:

I will get the exact figure for the Deputy but, as an indicator, unrecovered regulatory costs would run into the tens of millions. As such, they are worth seeking to recover.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In regard to variable interest rates, Professor Honohan basically acknowledged that the banks are overpricing new customers but the Central Bank will do nothing about it.

Professor Patrick Honohan:

Put like that, it sounds bad.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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That is the way the Governor put it. We can dress it up whatever way he wants, but that is the reality.

Professor Patrick Honohan:

The first point to make here is that the Central Bank does not have the power to intervene in this regard. Second, I do not think it should. As an adviser to the Government and the committee, I would not recommend doing that. I have seen what happens in other countries when it is done. The temptation is there to say the banks are charging too much, but they always seem to be charging too much. Eventually, that type of process either is a joke and ineffective, as it had been here for many years, or it presses down so much that the banks end up shutting up shop and not doing any business. If the situation became egregious, one would have to do something. It is not egregious at this time.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We have a problem with competition in the banking sector. One can make the case that to take action on this issue would encourage competition among the banks.

The problem is they are not competing. As they are dominating the market, there is a need for the Central Bank or the Government to act. I do not have the time to tease out the matter further.

On the consultation being carried out, my view, whether it is right or wrong, is that the Central Bank got one over on the Government. The Government was going to increase loan to value ratios with its guarantee scheme, with no mention of introducing the mandatory loan to value ratios the Central Bank has issued. The Government has now announced its plan. I will participate in the consultation, but it is very difficult to make a proper submission, given that there are two plans, one of which is the Central Bank's loan to value ratio, while the other is a mortgage guarantee. The mortgage guarantee will not be in place for January. I know that we are in consultation mode, but people are panicked and do not know what is happening. Professor Honohan mentioned a figure of 80%, but now he is suggesting rowing back on it and that we consider a mortgage guarantee. It appears that this must be kicked to touch for a couple of months until both processes are able to move forward and align with each other. In the middle of all of this he has issued a warning to the banks, rightly so, that if they start increasing loan to value ratios at this point, the Central Bank will be keeping an eye on the issue. What is the position? It appears to be a mess.

2:40 pm

Professor Patrick Honohan:

I am not keen on kicking to touch for a while. I am not accusing the Deputy of falling into that trap, but it is something people in the public service do a great deal. They tend to say, "There could be some drawbacks, so let us not do anything and think about it for months and months." We must do something about this issue; we must put something in place for the long term. If we do not do it now, we will never do it.

The Deputy says people are panicking. That must be put into proportion. The number of loans of more than 80% to first time buyers in 2013, the year for which I have data, is approximately 2,800. That is the number of loans that would have been affected if it had been in place earlier. It is not as if hundreds of thousands of people are affected. I am not saying it is not happening, but it is not as if the banks were giving lots of such loans. They were not giving loans, which is the reason this is a good time to introduce this measure because it is in a situation where it affects a relatively small number of people.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I do not suggest kicking to touch in the long term, but we should figure out what we are proposing in terms of a guarantee scheme, the structure it would have and how it would align with what the Central Bank is considering for the loan to value ratio. I agree that a loan to value ratio must be introduced.

It will not surprise Professor Honohan that the final point I wish to raise concerns the issue of information technology, IT, systems in banks. Ulster Bank received the largest fine that could be issued. Professor Honohan will be aware that I have been raising issues in the Dáil, unsatisfactorily, regarding the outsourcing of the Central Bank's IT systems. I understand an internal audit of security was carried out by Deloitte. How many audits have been carried out of the security measures in place following outsourcing? Did any of the audits reveal that there were risks that users working on the Central Bank of Ireland contract might not have accepted the responsibilities under section 33AK on the prohibition of disclosure of information? Did any of the audits identify weaknesses which increased the risk of security breaches at the off-site data retention site or did any of them reveal that HP Ireland had full access to Central Bank data, contrary to how it was supposed to operate?

IT systems are part of the core practices of banks. While it has many functions, the Central Bank is a bank. I have concerns about outsourcing and what has happened. I have raised this issue numerous times. There have been a number of blackouts and so forth.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I am trying to be fair to everybody by allocating slots of ten minutes. As this slot is now heading towards 13 minutes, I ask Professor Honohan to be brief.

Professor Patrick Honohan:

I am quite pleased with this operation. I know that some people are worried about it and have expressed their worries to me, but I am not satisfied that their worries are justified. The transfer of the systems took some time, of course, and there were hiccups and so forth, but everything is now running smoothly. We have checked that all of the data are very secure. Even the ECB thought we had done a good job. No jobs have been outsourced. As we had an end-of-life system, we had to get a new one. This is a system that can deliver - we could not have delivered it internally - at much lower cost to the State. I am not all that pleased that people have passed information to Deputies, but I respect their right to do so, if they think there is something seriously wrong. They might have thought that, but there is nothing seriously wrong. The system is working well.

Photo of Aideen HaydenAideen Hayden (Labour)
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I thank Professor Honohan for attending the meeting. It is always nice to engage with him. I wish to follow up on his macro prudential policy for the residential real estate sector and the various issues he raised in that document. I realise it is a consultation process and that we are part of that process. One of my concerns is the impact, which was alluded to in one of the national newspapers today. There has been much concern since this was announced and today, in a leaked report, the National Economic and Social Council, NESC, expressed its concerns about the numbers that would be unable to access home ownership in Ireland in the future. I wish to explore the interface between banking policy and public policy. There are reasons Governments wish to encourage home ownership, not least some of the research that shows that people in older age suffer less poverty because they own their homes, for example, and that home ownership is a very good means of redistributing wealth in society. People who do not have their own homes will never save that amount of money by investing, for the sake of argument, in stocks and shares or whatever else. There is much international research and many reasons Governments want people to own homes; therefore, it is a concern if a large number of people are excluded from the home ownership market.

I wish to explore some of Professor Honohan's methodology in what he has proposed. Are we dealing with prudent or exclusionary lending? Professor Honohan's paper raises the issue of boom and bust cycles. A question I raised with all of the banks' representatives who have appeared before the committee in the past few weeks was whether they thought we were either heading into or were in a property boom. The answer universally was "No", that when one took into account the rises and falls in the market, we were still 40% below where we were at the height of the market. This is for Professor Honohan's information in case he has not seen the reports from the committee. A number of the banks' representatives also said they would make submissions and that they were not in agreement with Professor Honohan's policy.

To move on to the methodological issues in what is being proposed, it appears to be a case of one size fits all. In other words, three and a half times a very large income is very different from three and a half times a very low income. I have concerns that what Professor Honohan is proposing is not sufficiently nuanced to the reality of people's lives.

The second point made by Professor Honohan refers to boom and bust, with rising and falling prices. Let us say my income is €80,000 per annum and house prices fall to, for example, €120,000 for the average home. I can see how the system works when prices are rising, but I do not see how it works when prices have fallen. Professor Honohan mentioned the European Systemic Risk Board as the framework he consulted, but when I looked at the rest of his research - he was looking at the Irish system - he only went back as far as 1998. He has not explored the Irish lending market pre-1998. Historically, Irish people do not default on mortgages and have no particular history of doing so, yet there has been a very high level of home ownership. Has Professor Honohan looked at the historical local authority mortgage market to examine the levels of default of people who have been on very low incomes? I am very concerned that we are closing doors based on an historical earthquake, as it were, at a particular time, rather than the norm in the Irish housing market since widespread lending began from approximately 1972.

2:50 pm

Professor Patrick Honohan:

We are not attempting social engineering or to change society into one in which there will be less home ownership. That would not in any way be part of our mandate. The side effects of some of our actions could be offset by other policies. One can argue that there should be joined-up policy across the board, but we cannot necessarily wait for joined-up policy if we have a mandate from the Oireachtas to maintain financial stability. That is what the Central Bank does. In the past six years the availability of mortgages has been extremely constrained and limited. We have not been in a situation before where, steadily, the new generation has not been able to get mortgages. That new generation simply has not been able to get them and there has been a large shift to the rental market. We should not exaggerate the degree to which a policy of this kind will alter the current situation as distinct from the one in the past.

Photo of Aideen HaydenAideen Hayden (Labour)
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To clarify, for example, in 2004 the National Economic and Social Council looked at the issue of affordability. It concluded people would pay more in renting than they would on a mortgage based on the affordability measures of the banks. By putting in place artificial limits on affordability for the sake of argument, prudence and so forth, they may not be valid in terms of what is genuinely affordable.

Professor Patrick Honohan:

First, I will not take seriously anything anyone said in this country from 2004 to 2007.

Photo of Aideen HaydenAideen Hayden (Labour)
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I am sure they will be delighted to hear that.

Professor Patrick Honohan:

Second, I am not going to take seriously the views of the banks when they do not agree with this policy. I am not surprised they do not agree with it. We are regulating them, but instead they say leave it to them as they know how to do this stuff. They have not shown us that they are able to do it safely. There is an indicative ceiling, above which they can have 15% or 20% of their lending to take account of the nuances of the situation. What we are concerned about is systemic risk, not individual risk. We are not saying a person cannot have a loan because he or she will not pay it back. We are saying some portion - only a portion - of the loan book risk can be above this limit. Otherwise, the banking system and, therefore, the State could be placed at risk. We are trying to put it in place ahead of a boom.

There is much concern among people about whether they will ever get on the housing ladder. There is a perception of a ladder going up and psychology is coming into play in a way that will not happen.

Photo of Aideen HaydenAideen Hayden (Labour)
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Nobody is denying we should not have a prudent banking system. Nobody is denying a prudent banking system will, over time, assist in preventing a boom and bust cycle. The question is around ensuring the provisions we put in place to ensure that prudence are based on accurate measures. Instead of looking at the position from 1998 onwards, I suggest to the Governor that he look backwards. In the 1970s there were other ways by which people were loaned money to purchase houses. It is valid to look at these types of lending and take them into his equation in deciding what those on low incomes will and will not be able to afford.

Professor Patrick Honohan:

One factor that needs to be taken into consideration is that house prices which I accept have come down a lot are still miles above, scientifically, where they were in the boom of 1977 to 1979 after rates were abolished. They came down in the 1980s. They have gone up again and not come down anywhere near these levels. A larger portion of the population is now in the business of trying to finance a much higher level of prices. Part of the reason this price level is so high is the ready availability of credit until 2007. The credit driven economy brought prices up. They came down after 2008. They are back up to some extent, but they are still high. I am not saying they are higher than what can be sustained, but they are much higher than they were in the 1970s and 1980s, the period to which the Senator is referring. Then people were able to afford to pay and service loans because they were not very high.

Photo of Aideen HaydenAideen Hayden (Labour)
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I simply suggest the Governor should extend his methodology in this process.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The failure to manage the housing market and the property sector generally led us to the worst economic crisis in the history of the State. I have been alarmed for some time about what is happening in the same area. When Professor Honohan says his role is not to engage in social engineering, is it to keep an eye on this issue and ensure it does not affect the State’s economic and financial stability?

Professor Patrick Honohan:

Yes, in so far as it relates to having control of tools of regulatory policy over the banking system and the financial sector, as well as giving advice to the Government. We do not control the housing market.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Does the Central Bank have a responsibility to express concerns if developments in the housing market could lead us down the same road we have been down before or a similarly dangerous road?

Professor Patrick Honohan:

Yes, in so far as credit and the housing market are concerned.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I agree with the Governor that at the heart of this is the problem of inflated property prices and people who do not really have the money to pay for property - a roof over their heads - except through the availability of credit. As he points out, even after the fall in prices, property prices are still much higher than in the past. Accordingly, we are in this conundrum that people need a roof over their heads but that the only way they can have one is by a dangerous extension of credit which they might not be able to sustain if their income becomes stressed.

Professor Patrick Honohan:

There is a risk one could get into that situation. I agree that there could be such a dynamic. One factor that needs to be considered is that the rental market has never been very much developed. Senator Aideen Hayden will argue that this is not where we want to go. However, the lack of a rental or shared ownership model through housing associations-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Let me interrupt as I have very little time. I hear this narrative, but I do not buy it all. I am looking at the private rental sector and rents are astronomical.

Professor Patrick Honohan:

Rents are astronomical, but properties are not very well managed in many cases and their availability is not very good. It is just not a very professional market.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I cannot remember a time in recent history when paying rent to a landlord was not much of a drag on people’s income as trying to pay a mortgage. Does a person pay a load of money to a landlord which he or she cannot afford or does he or she take out a mortgage that he or she cannot possibly afford?

3:00 pm

Professor Patrick Honohan:

There are particular problems currently with the supply of housing as it stopped for a long period. The response has been slow from planning and regulatory authorities. The availability of land-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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That is the point I am trying to get to. What we are discussing is at the heart of the bubble and our housing crisis, and is a fundamental and systemic problem around the world. It is at the root of the crash of the global economy, which is still very vulnerable to further crashes. The conundrum is that people's incomes are not sufficient to meet the inflated price of accommodation, be it rented or owned. The only way to square the circle is for banks to extend a dangerous level of credit and that is not sustainable.

Professor Patrick Honohan:

We try to avoid that.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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But that does not solve the problem of putting a roof over people's heads.

Professor Patrick Honohan:

That is why complementary policies are needed.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I put it to Professor Honohan that to resolve this conundrum we must make housing affordable or give people the level of income that will allow them put a roof over their heads. This could be done by controlling prices, increasing incomes or a combination of both. If one of these things is not done the circle cannot be squared, which leads to this conundrum. People feel excluded by the prudential 20% deposit issue but the Central Bank is afraid not to have the prudential buffer because the alternative path may lead to a credit bubble. I suggest the circle cannot be squared.

Professor Patrick Honohan:

It can be squared. This takes us away from my narrow remit but I think that while additional houses mean construction costs, that construction may be carried out by Irish workers. It cannot be the situation-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am sorry to interrupt but I would like to make the obvious point, as time is running out. I do not buy the narrative Professor Honohan has laid out because when 300,000 people worked in construction in Ireland and the housing market saw unprecedented supply levels, prices continued to go through the roof.

Professor Patrick Honohan:

That is because the implicit price of the land was high but now the price of land on the margins is not high.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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May I put an alternative scenario? I think the problem in the housing market is the extraordinary concentration of ownership in a few hands. Has the concentration of ownership intensified in recent years? I suggest that, in recent years, as homes have been repossessed and people have found themselves unable to purchase homes, a greater concentration of ownership has occurred. A small number of corporate investors are buying up properties.

Professor Patrick Honohan:

There are big corporate investors and, of course, NAMA is a big corporate investor. I am not sure how the distribution has affected this.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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NAMA is mostly selling in job lots to corporate investors.

Professor Patrick Honohan:

Big corporate investors could be effective managers of a more efficient rental market that does not have the characteristics outlined in some recent reports on the low quality of houses.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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How can increasing the concentration of ownership of residential and other properties be anything but a recipe for disaster?

Professor Patrick Honohan:

Let me remind the Deputy of Microsoft and Google. We may not entirely endorse such companies but-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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God forbid they ran our housing sector.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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The Deputy should not be provocative.

Professor Patrick Honohan:

I think that, on average, a professionally run rental company does a better job than a small landlord.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Has the Governor any figures on the greater level of concentration of property ownership? I suggest that he should get those figures because they are important. Greater concentration of ownership of property is an inevitable result of what has happened and it is very dangerous - it is a recipe for a repeat, on a bigger scale, of what we have already seen. This greater concentration of ownership of property means the circle that people have been trying to square in recent weeks cannot be squared. A small number of people control the market and, therefore, they control prices. They will set prices at the level that suits them to make a lot of money. People will either be priced out of the market or banks will be pressurised to extend more credit, which will send us back to the dangerous territory of lending money that should not be loaned.

Professor Patrick Honohan:

I do not quantitatively buy the Deputy's story. I do not disagree with the mechanism he has raised but I do not believe he has captured what is going on.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Would the Governor examine the issue of the concentration of ownership of property? Perhaps he could come back to the committee on this as it is important to understand what is going on.

Professor Patrick Honohan:

I shall reflect on it but it is outside the main territory. There has been much discussion recently, to which I have contributed, on wealth inequality, in addition to income inequality. We have just finished a survey of wealth in Ireland and I expect to see the first cut in the coming weeks.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Does it relate to the distribution?

Professor Patrick Honohan:

It is on the distribution of wealth.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The Governor has seen the Credit Suisse global wealth report. It suggests that 20% of the €508 billion of net household wealth in Ireland is held by the top 1% in society. It also states that the top 5% of society holds over 40% of net household wealth and the top 10% holds over 50%. What does the Governor say of this?

Professor Patrick Honohan:

These are the types of percentages one can see in any country. I would like to wait to see the numbers, which will be available in publications that are coming out.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Are they close to the truth?

Professor Patrick Honohan:

I do not really know. I would prefer not to anticipate as we went to much expense and trouble to carry out the survey and I would rather see what it says.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I have a quick question for the Governor. In the course of his contribution he said the industry pays many costs and that all regulatory costs could be so recovered instead of having the effect of eating into the Central Bank surplus. What percentage of the costs cannot be recovered? What changes are being requested?

Professor Patrick Honohan:

It is at the discretion of Government. At the moment we charge 50% in most cases but in some cases we charge 100% - it depends on the sector of the economy. Banks pay 100% for most costs and other sectors pay 50%.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Which sectors only pay 50%?

Professor Patrick Honohan:

Everything outside the banking sector. This is a loose summary because the information can be provided.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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What has the Central Bank requested from successive Governments? Does it seek 100% recovery of regulatory costs?

Professor Patrick Honohan:

We see no reason it should not be 100%. If an entity is creating regulatory costs we do not see why they should be incurred by the taxpayer indirectly.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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As regards the Governor's proposals other than the 20% deposit, such as income limits, will they be fixed proposals for early in 2015? Affordability is based as much on the price of a home as on interest rates. Will a sliding scale be used whereby if interest rates exceed a certain point only two and half times a person's income will be taken into account?

Professor Patrick Honohan:

We sought to create a regime that will not require change but that can be changed if things get out of hand. I do not expect things to be adjusted in line with interest rates and so on every year. It will be a steady regime but if the situation changes dramatically we can make adjustments. The numbers that we have circulated are not a case of dipping a toe in the water - they are robust numbers.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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As regards the issue around mortgage insurance and the system in Canada, has the Governor ideas he would like to share?

Professor Patrick Honohan:

Probably not as I would like to receive opinions on that. We have our own research on how this works and there is a variety of different models and experiences. There has been practice in Ireland too.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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The Governor has told this committee previously that mortgage arrears is an issue that constantly arises. What does the Governor have to say on this?

3:10 pm

Professor Patrick Honohan:

The mortgage arrears situation has continued, more or less, as we expected. In 2011, we started our mortgage arrears resolution system. The Central Bank started to press the banks to get to grips with their systems which were not really fit for purpose. After the legislation changing the Dunne judgment, the change in our code of conduct on mortgage arrears, our targets regime and our definitions of sustainability, it would not be fair to say the banks' systems are not fit for purpose. They may not be best in class but they are fit for purpose. Their policies are more coherent. They may not be exactly aligned with my views but one could not quarrel with them. Importantly, they have delivered on the targets.

Some 90% or so of the arrears cases are in a proposed state and 40% to 50% of the arrears cases are in a concluded state which, in many cases, involves court cases. We are not happy with the percentages going into the court process. We hope more will reach a situation where the indebted person and the bank talk to each other, exchange information and a viable restructure is concluded and that it does not go to a repossession of the property when that does not happen. It is the right solution in some cases but the percentage going to court is too high. We have said a million times that banks should work harder but borrowers should not be afraid to open the letters, get advice from MABS and engage because a better solution is available.

In regard to the cases which have been through this process since 2013, some 88% to 89% are meeting the terms of the restructure, which is much better than the earlier wave in 2011 and 2012, which we published recently. The percentage then was much lower. People were falling back into arrears again. It is early days and I am not saying the 88% will continue and that five years time, it will still be 88%. It will not be and some of them will fall by the wayside and will not be able to meet it. That is why I would be inclined to encourage the banks to be more liberal in their restructures so that fewer of them come back to the table.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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When Permanent TSB appeared before us, I think it said that when the whole process is being worked out and, for some reason or other, the house is given up voluntarily or is repossessed, it has a system where it writes off up to 80% of the residual debt. That is not something on which the other banks have come forward. If someone has followed the process through to the very end, it would seem to be unreasonable that he or she is left with this residual debt. Does Professor Honohan have an opinion on that?

Professor Patrick Honohan:

What the law and what the bankruptcy things say is, of course-----

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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The law is that-----

Professor Patrick Honohan:

The banks get their money back. What is realistic? It is done on a case-by-case basis. In regard to buy-to-let properties, where prosperous people are involved, I cannot see why I should say-----

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I am talking, more or less, about people under pressure.

Professor Patrick Honohan:

The banks should deal with them in a sensitive way and on a case-by-case basis. Different approaches are being adopted. I have always ended up on the soft end of this and the banks have said I am being totally unrealistic. The solution probably lies somewhere between what they say they will do and where I would like them to be.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Three years is a long time and the Central Bank has still not got its new headquarters sorted out.

Professor Patrick Honohan:

A lot of things delay buildings. I am not blaming anybody but the planning process is long as is the tendering process. We might have spent more time than strictly necessary in our internal consultations with the staff to ensure that the building that is delivered was not the building Anglo Irish Bank would have wanted but the building that will fit with our way of working in the Central Bank. To me, it is as ugly as it is to anybody else but we should have the cranes swinging there in the new year. The big contract is out for tender now. Everything has been designed. Bits of the facade have already been put in place somewhere in Dublin and they may be going up fairly soon.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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We have now finished with the main speakers. All speakers from now on will have five minutes. I will call out the list of speakers. The first speakers will be members of the committee, starting with Senator Byrne and Deputy Barry. Deputy Paul Murphy has indicated he wishes to speak but he is not a member.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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Not yet.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Was there always a rule that the second list of speakers would get only five minutes?

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Yes.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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That is news to me.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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If the Senator goes back over the record, he will see it has always been five minutes.

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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It is a quality five minutes.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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I hope so. We can always give Deputy Mathews a bit more time. He needs it.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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He just takes it. Does Deputy Rabbitte, who is a member of the committee, wish to take a slot?

Photo of Pat RabbittePat Rabbitte (Minister, Department of Communications, Energy and Natural Resources; Dublin South West, Labour)
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I am learning.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I will leave it so. The next speakers will be Deputies Tóibín and Mathews.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Gabhaim buíochas don Ghobharnóir as teacht os comhair an choiste inniu. I would like to ask Professor Honohan about the forthcoming banking inquiry and the European Central Bank's participation therein. Has he discussed it with his ECB colleagues?

Professor Patrick Honohan:

I have heard some discussions. I am part of this debate. I felt it was up to the rest of them to decide what they wanted to do. I gather they are not minded to attend. That was the latest I heard.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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They are not minded to attend. Has Professor Honohan discussed it with Mr. Draghi?

Professor Patrick Honohan:

I have chosen to stay quiet on this issue.

Professor Patrick Honohan:

What is the point in me telling them they should go? Should I tell them to go or not to go?

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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I think Professor Honohan should tell them. He has to decide. He is Governor of the Central Bank of Ireland.

Professor Patrick Honohan:

There is no question about that. We know where I stand on this but is this an issue that is-----

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Professor Honohan is also a member of the governing board. It is like the Trinity, except there is only two people-----

Professor Patrick Honohan:

Yes. There is no ambiguity about my position on this. In an issue like this, they will make their minds up on the basis of their position vis-à-visall national governments. They are not really concerned about the Irish situation.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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That is disconcerting. Professor Honohan says "They" but he should really say "We" because he is a member of the board. Surely he can be part of a discussion-making process which states that the European Central Bank, of which he is part and on which he represents us, will attend?

Professor Patrick Honohan:

Would Senator Byrne like to give me a reason that he thinks would convince them that it would be in their interests to do so? That is really what-----

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Professor Honohan has to go, as our representative on the ECB and in our best interest, and explain to them that this is absolutely essential for public faith in the European system. The public needs to find out what happened.

Professor Patrick Honohan:

I am not sure it is essential for us. I do not have any view on whether they should go or should not go but I think I can tell my understanding of the ECB's position at all points in time. I will do so and I will make distinctions between what they thought and what I thought.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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One could compare Professor Honohan to the Trinity but there are only two persons in one year - the Irish Central Bank and the European Central Bank. He has a key role here and I am sure he will have no difficulty appearing before the committee but does he not think it would be better if his European colleagues, some of whom seem to have more influence than others, appeared before the committee to find out what happened not just in Ireland, but in Europe? This has European consequences and they should appear before the committee in the context of accountability.

Professor Patrick Honohan:

I do not have any difficulty making that point to them but it will be ineffective. They will make their decision on the basis of-----

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Will there be a vote at the executive council on this?

Professor Patrick Honohan:

No.

Professor Patrick Honohan:

Individuals will be invited. The President of the ECB has probably already been invited.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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I am not on that committee, so that is why I am talking about it. I am sure my colleagues here, who are on the committee, would not be able to discuss it.

3:20 pm

Professor Patrick Honohan:

I have no difficulty with them coming and I will pass on any messages which this or any other committee wants to send. I will do that and express my view on the reception they will receive. I will do anything members want but it will have no effect. I like to spend my time doing things which have an effect.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Would there not be a vote of the governing council as to whether they should attend?

Professor Patrick Honohan:

If there is, then I will vote in favour of them coming. However, I am only one out of a total of 24 members.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Will Professor Honohan table a motion before the governing council or do whatever is necessary to start the ball rolling?

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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Perhaps we should go to the ECB in Frankfurt. We could send a strong delegation.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Yes, perhaps we should. There was a great deal going on at that time. Professor Honohan-----

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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Now you are talking.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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-----telephoned "Morning Ireland" on the morning in question from Frankfurt. He was over there, as part of his role, representing the country. However, he had another role and a separate commitment to the European Central Bank. On the day following the "Morning Ireland" interview, it was widely perceived that we had entered a bailout and that everything was sorted. We were grateful to the Governor, Professor Honohan, for clarifying matters which had been the subject of huge confusion that week. I accept that there was major confusion and that there were mixed messages coming from political sources. On the following day, the then President of the European Central Bank in Frankfurt saw fit to issue a letter to the then Government threatening that there would be no further ELA money for the banks if the country did not enter a bailout. This was notwithstanding the fact that the ECB had just provided more ELA money in the aftermath of Professor Honohan's "Morning Ireland" interview. We want to discover what happened, who was acting on behalf of whom, whether there was a bailout in place and why Ireland was threatened on the Friday after Professor Honohan had indicated that there was a bailout.

Professor Patrick Honohan:

I will give a full account of everything I know about that matter, which is a great deal.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Professor Honohan has said a number of different things. He first stated that his colleagues were not minded to attend the inquiry. Then he stated that he did not really know the position. How does he know that they are not minded to attend? Have they informed him that they are not going to come to Dublin and that he can forget about it? Has a discussion-----

Professor Patrick Honohan:

More or less like that.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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More or less like that.

Professor Patrick Honohan:

Yes.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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They stated that they could not be bothered coming to the inquiry.

Professor Patrick Honohan:

I did not say that they could not be bothered.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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They are not minded to come. I would certainly urge Professor Honohan to approach his colleagues and ask them to attend. We want to know what happened. Apart from our own problems, we seem to have been part of a geopolitical event.

Professor Patrick Honohan:

If I felt there were any secrets that were going to be covered up, then I would be in a different space. Everything is going to be completely open and I-----

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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I have no doubt that we will find out everything possible from the Professor Honohan and the Central Bank of Ireland. The committee has powers to obtain the necessary information. However, I am concerned about the European Central Bank - Professor Honohan is a member of its governing council - and what it was doing at the time of the bailout. Is Professor Honohan not of the view that he should go to Frankfurt and act as an advocate on behalf of the people of Ireland who want answers? Should he not say to his colleagues on the governing council that they must attend?

Professor Patrick Honohan:

I know the answers and I will provide them. If I-----

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Professor Honohan said there were no discussions-----

Professor Patrick Honohan:

-----thought they had any influence in respect of this matter, I would ask them to attend. However, I am not going to state that I will go to Frankfurt and oblige them to attend the inquiry because that is not going to happen.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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Why was it necessary for Professor Honohan to go on "Morning Ireland" on the day before Trichet threatened us with the removal of funding?

Professor Patrick Honohan:

One could put it the other way around and ask why he felt it necessary to write a letter after that. My appearance on "Morning Ireland" had nothing to do with Mr. Trichet.

Photo of Thomas ByrneThomas Byrne (Fianna Fail)
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However, Professor Honohan was in Frankfurt.

Professor Patrick Honohan:

I was but I was not doing it at anyone's behest. I was acting on the basis of my own judgment and in light of my responsibilities.

Photo of Tom BarryTom Barry (Cork East, Fine Gael)
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I welcome the Governor. It was interesting to hear him state that houses might still be overvalued. In 1991, a three bedroom house could be purchased for €38,000. The cost of that house then ballooned to €280,000 before subsequently dropping again. One is obliged to wonder what is the real value of such a property. When discussing affordable housing, we must not lose sight of the importance of amenities, etc. One of the mistakes made in the past was that housing was constructed but no amenities were put in place. There is a two-tier system in place at present. Dublin has many issues when it comes to housing but the dynamic in respect of the remainder of the country does not reflect this at all. I am in the unenviable position of being a landlord. In the past it was possible to charge €1,000 rent for an apartment in Cork. The figure dropped to €750 but has risen again, although only to €890 or €900. Rents have not returned to previous levels at all because demand is only okay - it is not accelerating.

I put it to Professor Honohan that many investors who bought into the rental market when it was at its height now want out. They cannot get out, however, because if they sell, they will immediately crystallise their negative equity. Many of these people became involved in the sector because their businesses were successful and they used their disposable income to invest. Apartments in Cork which previously would have cost €320,000 are selling now for €130,000. That is a massive reduction. In nearby counties, houses which previously would have sold for €200,000 now cost €100,000. The people who bought properties are making a loss of €7,000 on them each year. That is going to be the case for the next 15 years at least until these properties are washed out of the system. I have heard all the arguments put forward and I agree with some of them. Creating employment in rural areas would certainly help because people would be brought to places in which there is existing and affordable housing. However, using a one-size-fits-all solution for Dublin and the remainder of the country is not the way to go. People must recognise that two different dynamics are at play.

Legacy debt remains an issue. Many SMEs that would have become involved in the area of property remain saddled with their investments. I commend the banks because they have the expertise to deal with this matter and they have finally begun to examine it. Previously, they had stood apart from any involvement. Many businesses are under pressure as a result of bad investments and they have difficulties with regard to arrears. The split-mortgage proposal put forward in the Keane report could have been pursued more vigorously in the context of the SME sector in order to resolve the problem of overhanging debt. I am aware of people who obtained 20-year mortgages in dubious circumstances. Expecting these individuals to remain healthy and wealthy up to the age of 70 was always going to be a big ask. Interest rates remaining low has been a saving grace. When we obtained our mortgage in 1997, the rate which applied was 7.7% and we were delighted with that. I have heard people criticising mortgage interest rates of 4%. If one cannot afford to pay that rate of interest, then one should not be getting a mortgage. In historical terms, 4% is a low interest rate. However, Professor Honohan may disagree. As already stated, the pillar banks have come a long way in terms of dealing with this matter.

Is Professor Honohan of the opinion that there is a need to establish a commercial bank - in the past we had the ICI - to deal with SMEs? Such a bank would have the expertise to assist SMEs with their legacy debt and their links to the property market and could provide them with finance into the future.

Professor Patrick Honohan:

The Deputy made a number of points. On the geographical split, it is true that the Dublin area has experienced a big upturn in prices. There has also been an upturn in some of the other larger urban areas but to a much more limited extent. As far as our information is concerned, the number of high loan-to-value and loan-to-income mortgages outside the Dublin area is extremely small. People might ask why we are not just introducing what is proposed in respect of the Dublin area. Actually, it seems as if it will have little to no effect outside Dublin. This is presumably because property prices are lower and because the people who want to buy will be able to raise the higher percentage required in terms of their deposits and so forth.

I do not know that I can give much comfort in respect of the prospect of prices returning to where they were at the peak. The peak is the unusual aspect. In the context of where we are now, we have no evidence that prices are out of line. In other words, that they are either too high or too low. Nobody has a very precise indication in that regard. Previously, we would have had an indication. During the boom, for example, we would have stated "It is too high but we are not sure by how much". Now it is in the range where people say "It might be all right". I am not sure I can provide the Deputy with much comfort in respect of that matter.

I am in favour of new banks entering the market, as long as they are well run by proper people.

With regard to the question of the State starting a new bank, I hardly need to remind the Senator that the State owns two substantial banks at present. It is hard enough to fix the current problems. The problems, as the Senator said so rightly, are entangled with legacy business. A businessman coming to a new bank saying he would like a loan will first be asked what his current business is, and then he will be asked who he borrowed from before, thus bringing one back to the whole settlement. The banks are dealing with SME loans to some extent with split mortgage-type arrangements, similar to the half debt concept. Much of banks' processing of SME cases is in this category. They try to separate the property-related debt, which they regard as a separate loan, from the ongoing business debts. The Senator is correct in saying that is an important part of the solution.

3:30 pm

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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I thank Professor Honohan for attending. I was going to talk about mortgages. Following on from Senator Byrne, I have a few questions. What does Professor Honohan think of the Trichet letter? Is it appropriate for the ECB to be sending letters such as those sent to Ireland and Italy demanding policy change, with a threat of loss of emergency liquidity assistance, or the buying of bonds?

Professor Patrick Honohan:

While I could get into this area, I appeal to the Chairman to allow me not to because these matters will be discussed in great detail by the other committee in a very short period. I feel this matter is out of the scope of this committee and I am really rather reluctant to speak in a half-baked way without careful preparation and context. I could give answers but just do not believe it is the most fruitful way to proceed at present. Senator Byrne was particularly exercised over the question of the ECB. I went down that road to some extent but do not want to get lured further down it, if Deputy Murphy does not mind.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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I accept that but Professor Honohan did answer Senator Byrne's questions.

With regard to the new mortgage recommendations, does Professor Honohan have an estimate as to the percentage of mortgages that qualified under the new recommendations?

Professor Patrick Honohan:

Yes, I do somewhere but, as I stated at the beginning, I left some of my papers behind. Even if I do not have to hand the exact table I am looking for, I will be able to recall some information. That I left papers behind is really a nuisance because I had a super table that had all the detail. I will be able to send some of the detail to the Deputy. This is very annoying. I had the exact answer to the question but it is not in any of the papers I have to hand.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Perhaps Professor Honohan could send the information to the Deputy.

Professor Patrick Honohan:

I will. Some mortgages will be affected. For example, there were approximately 10,000 mortgages given out in 2013. I am speaking from memory and hope I am correct. Approximately 2,800 were for first-time buyers and the relevant percentage was in excess of 80%. If we followed the exact template set out, making reference to 15% of the value mortgages, we could have 1,500 instead of 2,800. In addition, a small number of movers - mortgages - were in excess of 80%.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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How come the Governor has those figures? All the banks refuse to answer that question. They said it was not possible to answer it.

Professor Patrick Honohan:

No bank will want to tell the Deputy because its competitors would then know the figures. The Central Bank, however, has all the information and stirs it up. There are enough banks so none of them can tell-----

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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They all suggested to the committee that it was not a case of their not telling but that is was simply not possible to work out the figures.

Professor Patrick Honohan:

It is quite possible they have not used the figures from their management information. We did not ask them for the number requested by the Deputy but we have considerable information because our approach to the banks has been more intrusive. We process it in order to be able to discover the details.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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Is that an effective admission that a percentage of the mortgages are effectively unsustainable?

Professor Patrick Honohan:

No. If the banks continued to lend on that basis, it would be the pattern of their overall business, and not just the new business, as years went by. They would be vulnerable to a downturn in the economy as a whole because too many of them would start to go bad.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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What impact does Professor Honohan believe the recommendations will have on rental prices?

Professor Patrick Honohan:

This is a difficult question to answer. There is a certain amount of residential property. Some of the property would shift to being sold, if in rental, and vice versa. There are not that many empty rental properties in the Dublin area, as we all know. If somebody has to stay a little longer in a rental property because he is not buying a house, it is not clear that this will change the situation all that much.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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Is there not a danger that rents could go up on the basis that the market would become even less liquid, which is the reason people are being forced into the rental sector, and that ownership could become concentrated in a smaller number of hands? It is not more expensive to have a mortgage; it is simply more difficult to access one, and this benefits institutional investors, etc.

Professor Patrick Honohan:

By pouring less credit into the demand side of the housing market as a whole, it seems likely that it will lower everything in terms of the direction of house prices and rental values. I am not saying it will bring them down from where they are but I am referring to where they are going. The problem with analysing this is in determining the other side of the market, the construction side, and whether there would be a response of construction. I do not believe so. There are delays in getting construction under way independently of the credit system. Builders do worry about the availability of credit for them in the process of building but that is only a small part of the supply.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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The Governor said the Central Bank recently updated the sustainability guidelines to include guidance on instances in which sustainable solutions may extend into the borrower’s retirement. Does this mean mortgage arrears follow people to their grave? A high percentage of people with 35 or 40 year mortgages are exiting interest-only arrangements at this stage. What does that mean in practice? For how long does an arrangement that is deemed to be sustainable last?

Professor Patrick Honohan:

If people do not want to move, although some bank might have a rule stipulating the whole debt must be paid off by the time one is 65 or 70, we should not bar them from extending their contract into retirement to allow them to do what they want to do. That is a safe and sustainable approach.

Photo of Paul MurphyPaul Murphy (Dublin South West, Socialist Party)
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It puts pressure on them.

Professor Patrick Honohan:

It is not ideal but I do not see it like the Deputy. It is the choice of those concerned, bearing in mind that the alternative is having to leave the house and go somewhere they do not want to live. If the arrangement is possible, it should work.

Photo of Peadar TóibínPeadar Tóibín (Meath West, Sinn Fein)
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Gabhaim buíochas as an cur i láthair. I cannot say how shocking it is to Irish ears to hear sentences to the effect that the ECB is not minded to attend the banking inquiry. The ECB played a significant role in Ireland’s economic crash. Professor Honohan would do a significant favour to the Irish people if he were to communicate robustly to the ECB the committee's view that it should attend. He should use any mechanisms required, such as putting forward a motion to try to exert pressure on the ECB to make it attend. There is no doubt about how angry people will be when they hear sentences such as the one to which I alluded. I acknowledge that Professor Honohan does not want to labour the point on this issue so I will proceed to my next question.

For me the role of the Government is to ensure prices of houses are kept low. High house prices really only benefit banks in the long run. It is also the role of the Government to ensure prices are steady in the long run so people can plan for the future. It seems we are now entering a period in which the opposite of those two points is the case. House prices are unsteady again and in some places they are rising incredibly quickly.

The Governor mentioned that there is no credit bubble in the property market currently. There is not but there is a bubble in the price, and that is coming from the supply side problems in the main.

The banking industry plays a big role in that supply side with regard to credit. What can be done to ensure that credit goes to the individuals seeking to supply extra units in the areas of greatest demand to ensure that the objectives of the housing market are met?

3:40 pm

Professor Patrick Honohan:

The banks are being far more cautious than they were in the past. They are not giving 100% loans to builders for the first phase of building. It used to be the case that they could get very high percentage loans, but they are now getting loans of possibly 70%. The Central Bank will not instruct or encourage banks to take on that risk. That is a risk that should be taken by providers. It is an equity risk. Banks should be lending for things they can be relatively sure they will get back. There is lot of equity finance coming into Ireland from abroad. Deputy Boyd Barrett already mentioned the investors buying up blocks of flats and so on. It is possible that this channel could be used. I think builders do not want to take that higher cost because they would like to see all of their funding sourced at the low interest rates that are available from banks. I cannot see that the banks should be pushed or encouraged into taking those kinds of risks with builders and developers.

Photo of Peadar TóibínPeadar Tóibín (Meath West, Sinn Fein)
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Sometimes we have a pro-cyclical experience whereby, straight after a crash, there is a movement towards a drying-up of credit, etc. It makes the cycle deeper and worsens it. It seems to me that the things we do in a recession, we should be doing at the top of the market, and the things we do at the top of the market we should do during recessions. We actually get it wrong, and this is an example of it. Due to the fact that we have been burnt by the top of the market, our behaviour has swung and made the bottom of the market even worse, particularly from the supply side.

I have been told that up to 500 eviction cases are in front of the courts on a weekly basis. Obviously, this has not happened by accident. It must be happening as a result of the policies of the banks. Those policies are obviously regulated to a certain extent by the Central Bank, so they are being at least tolerated by the Central Bank. Is this the case and why is it happening?

Professor Patrick Honohan:

It is happening because banks are dealing with mortgage arrears. In most cases, these are long-outstanding arrears. I do not have the percentages, but most of them are above two years. In a high proportion of the cases, the banks have not been able to get co-operation from the borrower. Those are the facts that are provided to us. Therefore, the banks are taking legal action. The Central Bank has repeatedly urged borrowers who are faced with this situation, in which things have got so bad that they are being taken to court, to get advice from MABS, go to the bank and give a statement of financial affairs. It is only on that basis that a deal can possibly be made to possibly restructure the loan. We have never seen repossessions going to court on this scale. This is what happens in the process of-----

Photo of Peadar TóibínPeadar Tóibín (Meath West, Sinn Fein)
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I deal with about three or four new mortgage distress cases on a weekly basis. To bring them to fruition takes weeks. To be honest, a large proportion of them involve incompetence within the banks. For example, staff member A is dealing with a case, but the next time something happens staff member B or C deals with it, until about ten different people have dealt with the issue in the space of five or six months, all of them either misunderstanding or not fully understanding what is happening. To a certain extent, the banks seem to be bringing the individuals along on a dance of dealing with the issue, to the inevitable conclusion of the objective in the initial stages. Could Professor Honohan answer the question and tell me how we can resolve this?

Is it the case that some of these people are collateral damage and will be evicted? Some of them have buried their heads and are not dealing with the issue, but some are trying to deal with the issue and meeting with incompetence, while others are just collateral damage.

Professor Patrick Honohan:

I make no excuses for mess-ups in banks. I do not deny that they are happening. There are lots of checks and balances. Nobody gets evicted by accident, and the courts are at least an additional protection. The Central Bank does not check every case because we are not set up to do that. The banks are doing a much better job than they were, but there will no doubt still be many blunders on the way, which is not good for people in very distressed situations fearing the loss of their homes. I do not make any excuses. I am worried about this. I am worried about the number of cases that are going to court and that they are being taken much further along than necessary. People such as Deputy Tóibín who deal with cases on a one-by-one basis are providing a fantastic service to those constituents, in addition to MABS and other advisers who help those customers deal with the banks.

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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I will stay with the mortgage question. I have gone down a long way down the road in about five cases pro bono, where I really rolled up my sleeves, and I can truthfully say with hand on heart that the banks are operationally out of control. The point Deputy Tóibín made is absolutely valid. There are different people all over the place and there is no coherence. There is also a reluctance and an objection to meeting with people at a senior level in the banks, and that is not on. It is just not on when the Government owns almost 15% of Bank of Ireland and most of AIB. It is not acceptable. As Professor Honohan rightly says, families are distressed. Roughly speaking, there are about 100,000 families in mortgage distress at the moment. That equates to 350,000 human souls, on average - four times the capacity of Croke Park. That is not acceptable in a civilised society. The Tánaiste, Deputy Burton, had the horrible experience of being trapped in a car for two hours. Three hundred and fifty thousand people are trapped in their homes for the foreseeable future - for the rest of their lives - and that is just wrong. We will park that for a moment.
In respect of property values, even in Dublin, it is not right that the newspaper headlines scream "23% uplift in the last year". It is irresponsible reporting. Why? It is because the volume of those transactions that report sale prices is only perhaps at one third the normalised level of transactions in a city of 1.25 million people with the demographics we have? That is wrong, but it is comfortable for the banks to hold that idea in people's minds. Why? It is because they can then manage the provisions they have on their loan books and not write off loans they should be writing off through split mortgages, which involves putting part of the loan on an annuity basis within the lives of the borrowers and parking the rest. This is clocking up capitalised interest to be pounced upon at some day in the future with this false notion that property values in Dublin have risen by 23%. It is wrong. I hope Professor Honohan agrees with me, because these are questions and statements in one. The value of a modest three- or four-bedroom suburban house in Dublin that may be rented on a normalised basis for €2,000 per month is about €360,000, no matter what any clipboard estate agent tells one. This is because €2,000 per month is €24,000, and if one multiplies that by 15, which equates to a 7% residential property gross yield, one gets €360,000.

We know houses are changing hands at €500,000 in that category and, therefore, they are economically overvalued from the point of view of sustainability. Why are prices rising? There are a few factors involved. There is the amount of savings on which a return on deposit cannot be got because there is nil interest, so investors chase the few houses that are on the market. If we add to that the arrival of American equity funds - we are told by Frank Daly and Brendan McDonagh that 98% of NAMA sales are to originally dollar-based funds that buy euro to buy the investments - the issue is compounded. There are all sorts of foggy and shadowy movements taking place that are not being explained by the people who could explain them in Ann-and-Barry terms for the benefit of the million and a half people whose lives have been ripped apart by the credit pyramid Ponzi scheme that was built up between 2001 and 2008, when the domestic banking economy grew from three times to five and a half times our national income. The banks are measurably culpable for that pyramid Ponzi scheme. How dare they insist, through law, on the collection of all the loans they advanced, with the reckless funding models they had, to create that asset price bubble. That is wrong. Professor Honohan is in a position, being hugely experienced academically and through modelling and all the rest, of being able to tell that story and to get the message across to the European Central Bank in Frankfurt, saying, for instance, that the €25 billion----

3:50 pm

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Deputy Matthews, do not point a finger at me when I interrupt you. Does the Deputy wish to get a response from Professor Honohan, or is he just going to-----

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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It is okay. I am just-----

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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No; I am asking the Deputy a question. Is he going to use his time slot for giving his own statement or does he expect to get a reply from-----

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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My question is this: will the Governor think about it and act upon it? That is the question that comes at the end of my contribution.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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The Deputy's allocated five minutes are up. I am asking him if he wants a response from the Governor.

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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No.

There are €25 billion worth of bonds in Professor Honohan's drawer. They are contaminated, toxic bonds and they should be cancelled. My proposal is that 26 people, one from each county in Ireland, from the committees or the Oireachtas, should arrive at Professor Honohan's offices and ask him to give them the keys and say they want those €25 billion in bonds and that they are going to make a telephone call and tell Mr. Draghi that this is not valid debt but losses that have been imposed unilaterally in a strong-armed, head-locking manner from a busted bank onto the people of Ireland. Even Tim Geithner, in his recent book, admits this if one reads between the lines. It is wrong. The amount of €25 billion can be allocated to projects for which funding is required - €10 billion for the water reservoirs, treatment plants and pipes that need to be reconditioned, remodelled and rebuilt, which would leave €15 billion for other capital projects and support for the social protection that has been ripped out of the lives of too many people - those who are vulnerable - during the past four years.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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Thank you, Deputy.

Photo of Peter MathewsPeter Mathews (Dublin South, Independent)
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This is where we have to use our imagination and conviction and where we need to step up to the plate for the people.

Photo of Pat RabbittePat Rabbitte (Minister, Department of Communications, Energy and Natural Resources; Dublin South West, Labour)
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To return to the point the Governor made about extending credit to builders and developers in the context of the supply problem that we have, I can understand why he said what he did, but it leaves the Minister for Finance or the Minister with responsibility for housing with a difficult problem in the context of the acute shortage of supply, at least in the capital city, where there are few enough builders left standing and where banks are saying that they will give them only X% or they do not want to know them, certainly before the stress tests. I have been told by developers that they were told by banks five years ago that the banks had had a bad experience with them and that they would not extend any money to them. The point I am making is that it takes 12 to 18 months to prepare a site and get houses up, and if the builders that are left standing are in deep trouble and cannot carry that, we will not be able to deal with the supply side issue with the kind of despatch that is needed. Every third morning we will have people concerned on the community side - charities and all the rest - adducing very sad cases. Those people do tremendous work but they are definitely in danger of being canonised by the media before they pass away, while the Government is pretty helpless in terms of addressing the supply-side issue. In terms of solutions with regard to raising the rent supplement, most economists would say that if we raise the rent supplement, within three months rents will have caught up with it again. That is not a solution to the issue. I would like to hear the Governor's response on that point.

Professor Patrick Honohan:

A lot of this is way outside my territory, as the Deputies will realise. A number of Departments are working on their aspects of the problem, but there is an issue with the supply of accommodation in the Dublin area. The supply side is the important element to solve. That requires builders, land, planning approvals, ensuring, according to experts I have talked to, that some elements of design and building regulations introduced in the good times - one could say we did not actually need those - which add to the cost and slow construction are dealt with, and tapping into the availability of foreign equity funds. Deputy Matthews talked about a 6% or 7% return on property. There are many people in the United States and elsewhere in world who are looking for 6% to 7% in private initiatives - I do not know whether NAMA can be a broker in some of this as well - to channel some of that money, and it would not take all that much to fill the equity gaps for builders. The delays are coming from a wide number of areas. I know a number of Departments are working on them, but one would have expected that after six years there would be people ready to go - planners ready to say "Here is the area in which we need accommodation and these are the requirements, and while they are sufficient, they are not as lavish as they were in the past."

Photo of Billy TimminsBilly Timmins (Wicklow, Independent)
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I thank the Chairman for permitting me to contribute. I followed Professor Honohan's contribution on the monitor.

To take up Deputy Rabbitte's last point, I made a note on foot of it to the effect that this is an easy touch for tax revenue. There has been a sense of hypocrisy at the core of all Government policy on housing in recent years. I refer to the non-essential costs associated with housing. Only last week a young girl in my area who got planning approval for a house had to pay a levy of €10,000 before she borrowed any money to build the house and provide the infrastructure. The Central Bank may have a role to play in trying to drive home some common sense to policy makers. We talk about access to water being a human right, but one of the basic human rights is housing, and we make it very difficult for people to purchase a house. I know developers are not the flavour of the month, but when I heard it mentioned earlier that we do not know what house prices are, I telephoned a builder and he made the point that if he spends €100 on blocks and cement and spends ten hours putting them up, he must at least get €200 for building the wall; he cannot build it any more cheaply. Those are aspects we need to examine.

The other issue I want to raise is the reporting of house prices. I read in a local newspaper recently that house prices in Galway, given out by a reputable company, showed a dramatic increase.

However, they showed a dramatic increase. While I stand to be corrected on the exact detail, apparently on analysis there was a house valued at €1.3 million in Athenry. Although this clearly was an incorrect figure, it drove the percentage through the roof, as only ten or 15 houses had been sold during the period. Such percentages send panic through people. I can remember appearing on "Questions and Answers" in January 2008 or January 2009 with a representative of the Construction Industry Federation in a broadcast on which the auctioneers' association was well represented in the audience. They talked up the housing industry, but it was a complete sham. There must be some way of monitoring the position in order that people know the truth.

I have almost concluded, but the Governor mentioned infrastructure. One of the unintended consequences of the establishment of Irish Water is that it will now, in effect, be able to decide where new development will take place because it will be able to decide what land will be serviced as it will actually hold the purse strings. Does the Governor see potential dangers in this?

On a highly relevant issue, the Governor might recall a few members of the Reform Alliance and I sent a document to the Central Bank based on fair value lending. The document showed the historical correlation between the average house price and the average income. We had sought a lot of inputs into it for a number of months beforehand and considered it to be a good document. We remain of that view and while it might seem like heresy to some, its purpose simply is to stop irresponsible lending for which ultimately and historically the taxpayer has been obliged to pick up the tab. I seek the Governor's views because we consider it to be a better way than seeking a 20% deposit as it pertains to the actual amount of money being lent. I have always maintained Ireland did not have a property bubble; rather, it had a lending bubble that caused the difficulty.

4:00 pm

Professor Patrick Honohan:

That is the part that can be under the control of the Central Bank. I recall the article, although I do not remember the details.

Photo of Billy TimminsBilly Timmins (Wicklow, Independent)
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I will drop in a copy after the meeting.

Professor Patrick Honohan:

The Deputy should forward another copy to me. We wanted to have a system and a rule that would be very operational, in that banks would know how to do it and which could be implemented right away. While I believe we will be able to get a good design, I will certainly take account of that proposal and review it again. I will take it as a response to our consultations.

Photo of Billy TimminsBilly Timmins (Wicklow, Independent)
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I thank the Governor.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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On behalf of the joint committee, I thank Professor Honohan for his attendance during what has been a useful and informative meeting. The committee will go back into private session to deal with some correspondence.

Professor Patrick Honohan:

Thank you, Chairman.

The joint committee went into private session at 4.15 p.m. and adjourned at 4.20 p.m. until 10 a.m. on Thursday, 27 November 2014.