Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I must confirm for the Deputy that the lending institutions in Ireland, including those in which the State has a significant shareholding, are independent commercial entities. I have no statutory role in relation to regulated financial institutions passing on the European Central Bank interest rate change. It is a commercial matter for each institution concerned. Neither have I responsibility for the interest rate paid to depositors by the financial institutions.

The Central Bank has responsibility for the regulation and supervision of financial institutions in terms of consumer protection and prudential requirements and for ensuring ongoing compliance with applicable statutory obligations. However, it has no statutory role in the setting of interest rates by financial institutions, apart from the interest rate cap imposed on the credit union sector in accordance with the provisions of the Credit Union Act 1997.

The mortgage interest rates that financial institutions operating in Ireland charge to customers are determined as a result of a commercial decision by the institutions concerned. This interest rate is determined, taking into account a broad range of factors, including European Central Bank base rates, deposit rates, market funding costs, the competitive environment and an institution's overall funding arrangements.

I remind the Deputy that in late 2011 the Taoiseach asked for the Central Bank's opinion on developments regarding mortgage interest rates and possible action by the bank in this regard. In a letter to the Taoiseach, dated 11 November 2011, the Deputy Governor stated the Central Bank would not be seeking the power to have regulatory control over the setting of retail interest rates. He indicated that the experience of such controls in the past and in other countries did not encourage the Central Bank to believe such a regime would be advantageous in net terms as the banking system recovered its normal functioning. Binding controls tend to reduce the availability of credit and channel it to the most creditworthy customers, starving smaller and less secure customers of credit. Binding controls would have a chilling effect on the entry of sound competitors into the market. By absolving banks of their responsibility to price risk accurately, binding interest rate controls would, especially during the 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 a bailout.

The Deputy Governor also mentioned that within its existing powers and through the use of persuasion, the Central Bank would continue to engage with specific lenders which appear to have standard variable rates which are disproportionate to their costs of funds. This is a course of action I expect the Central Bank to appraise continually.

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