Brian Hayes (Dublin South West, Fine Gael)

I thank Deputy Collins for raising this important issue and giving me the opportunity to place on record my position and that of the Department of Finance.

On the issue of lending in general, the Government has imposed lending targets on the two domestic pillar banks for the three calendar years, 2011 to 2013, inclusive. Both banks will be required to sanction lending of at least €3 billion this year, €3.5 billion next year and €4 billion in 2013 for new or increased credit facilities to small and medium sized enterprises.

Both pillar banks have provided me with their plans to ensure that the 2011 target is achieved. This is particularly relevant given the comments contained in the fifth quarterly report of the Credit Review Office, which state that "it will be a challenge for each of the banks to reach their €3 billion sanction target for new and restructured facilities in the current year."

In an effort to recoup some of its higher input funding costs, Bank of Ireland is changing the method of calculating its interest rate on its term lending facilities from the current EURIBOR derived reference rates to a reference rate based on "bank cost of funds".

The decisions financial institutions operating in Ireland make on the interest rates they charge to customers are commercial decisions for the institutions concerned. Interest rates are determined by a broad range of factors including ECB base rates, deposit rates, market funding costs, the competitive environment, and an institution's overall funding. As in the case with mortgage interest rates, the Government has no statutory function on business interest rate decisions made by individual lending institutions at any particular time.

I appreciate that this increase may be difficult for some business customers to absorb. The Deputy makes a valid point about very small businesses, especially the farming community, and the degree to which those businesses can remain viable on the basis of existing commercial mortgages. I understand the bank has written to its business customers inviting them to contact their respective relationship managers who will assist them in managing the impact of this change and look at potential solutions for their businesses.

In his report of 11 November 2011 to the Taoiseach on the issue of passing on mortgage interest rate adjustments following ECB actions, the Financial Regulator and the Deputy Governor of the Central Bank stated that the power to exercise close regulatory control over retail interest rates is not sought by the Central Bank. Similar principles apply to business interest rates. The Deputy Governor has indicated that the Central Bank will, within its existing powers and through suasion, engage with specific lenders which appear to have standard mortgage variable rates set disproportionate to their cost of funds. He has indicated that experience of such controls in the past and in other countries does not encourage the Central Bank to believe that such a regime would be advantageous in net terms as the banking system recovers its normal functioning. Binding controls tend to reduce availability of credit and channel it to the most creditworthy customers, starving smaller and less secure customers from credit. The regulator indicates that this could have a chilling effect on the entry of sound competitors into the market. By absolving banks from their responsibility to price risk accurately, binding interest rate controls would, especially during this recovery phase, impede progress towards the re-establishment of bank management practices that can ensure a healthy and free-standing banking system no longer dependent on the Government for bailouts.

In conclusion, it is vital that the banks continue to make credit available to support economic recovery. However, it is not in the interest of the banks, businesses or the economy for finance to be provided unless the business is viable and has the capacity to meet the interest payments and repay the sum borrowed.

The Deputy asks a fundamental question. Was this raised at last week's meeting? My understanding is that it was, as part of myriad other issues raised by the Taoiseach, the Tánaiste and the Ministers for Finance and Public Expenditure and Reform. The management of the three banks in questions were specifically asked to come in and outline their plans on SME funding, following the funding commitment they gave to the State once recapitalisation emerged. This was one of the issues raised and we will continue to pursue it through the regulator and the Department of Finance.

I appreciate the point made by the Deputy. Significant businesses can remain once credit lines are there. He makes a valid point. If the rules of commercial lending are changed, albeit to small businesses, it can have a profoundly negative effect on that business. I can assure the Deputy this issue was raised.

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