Niall Collins (Limerick, Fianna Fail)
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I thank the Ceann Comhairle for selecting this topical issue for discussion. We are all aware of public disquiet in recent weeks and days concerning the failure of banks to pass on a reduction in the European Central Bank interest rate, although Allied Irish Bank changed tack after several days. This is an issue of major concern because members of the public appreciate that the purpose of the ECB decision to reduce the cost of its funds was to help people who find themselves in distress and stimulate growth and spending in the European economy.

Most of the debate on this issue has centred on distressed mortgage holders and others who find themselves under pressure as they try to discharge their mortgage obligations and liabilities. An important issue has, however, gone under the radar, namely, the decision by Bank of Ireland to notify business people who hold commercial mortgages and properties of a change in policy. The change gives effect to one of the terms and conditions in the small print of the original mortgage. As a result, the bank has changed the basis on which the interest rate is calculated from the Euribor rate to what is known as a "cost of funds" rate. The net effect of the decision has been to increase the interest rate being charged to commercial customers of Bank of Ireland by 0.7%, which is a significant amount.

Those affected are primarily business people and farmers. I have been informed by individuals working in the banking sector that many people acquired large mortgages when they purchased or extended their farms in recent years. Business people, who are under pressure as a result of problems accessing credit, declining footfall and a reduction in spending power, are being squeezed again by the decision of Bank of Ireland to enforce a clause in the small print of mortgage contracts for commercial customers. Was this matter discussed when the Economic Management Council met representatives of the banking sector last week? While I appreciate the Minister of State, Deputy Hayes, did not attend the meeting in question, I am sure he has been briefed by the four members of the Government who were present.

This issue is significant for another reason. There is a lobby to eliminate tax shelters for people who hold commercial mortgages. Many people invested and planned their businesses around the various tax shelters which were offered in the past. The Department of Finance is carrying out an impact assessment on the effects of any measures which would abruptly eliminate or phase out these tax shelters. If these shelters do not run for the lifetime envisaged for them, business people will come under more pressure as tax liabilities not foreseen in their business plans will be triggered.

What engagement, if any, has the Government had with the banks from the perspective of business people and farmers? The House has correctly had extensive debates on personal mortgages and debts. The decision by Bank of Ireland to increase the interest rate which applies to commercial customers will cost a significant amount. An example given by the bank showed that the monthly repayment on a seven year mortgage of €480,000 would increase by approximately €350, a significant amount of money that will drag on cashflow.

Brian Hayes (Dublin South West, Fine Gael)
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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.

Niall Collins (Limerick, Fianna Fail)
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I thank the Minister of State. The reality is that the Bank of Ireland is trying to recoup its losses on tracker mortgages, so the Government needs to look at this. Perhaps the Minister of State can take that message back to the Department of Finance.

I am told that the regulator and the Central Bank signed off on this change in interest calculation policy. Can the Minister of State confirm that for me? I appreciate he might not have the answer with him tonight, but perhaps he can send it to me by email or through written correspondence.

Does the Department have any engagement with the public interest directors? They are coming back into the spotlight, following the mortgage and personal debt issues that were discussed last week and this week in the Dáil. They also got a mention today during Leaders' Questions. Will the Government be engaging directly with those public interest directors? Can the Minister of State and his colleagues talk to them directly on this issue and others, especially in respect of Bank of Ireland?

Brian Hayes (Dublin South West, Fine Gael)
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The Deputy will have seen the action taken by the Government last week in respect of AIB, 98% of which is owned by the State. The same cause and effect is not as obvious when it comes to Bank of Ireland, in which the State has only a 15% holding, while Ulster Bank has no relationship with the Irish taxpayer or the ECB, because it is funded internationally. When public interest is in line with Government policy, the public interest directors will ensure the Government's view is understood by all concerned.

I thank the Deputy for his question on whether the regulator signed off on the change in interest calculation policy. I will get the answer for that. We have an independent regulatory system here. It is important that politicians understand the difference between independence on the one hand and where we have to act on the other hand. The key issue is to use common sense to make sure that we have a profitable banking sector where we can recoup the moneys we have put into these banks, but also to ensure fairness. The objective of a reduction in ECB rates is to get lending going again and to get domestic economies across the eurozone going again. It makes no sense if banks do not pass on those rate reductions, either to their commercial customers or their mortgage customers.