Dáil debates

Tuesday, 21 May 2013

Ceisteanna - Questions - Priority Questions

Bank Charges

2:15 pm

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

53. To ask the Minister for Finance his views on the need for banks to pass on European Central Bank interest rate changes; and the action he will take to compel them to do so. [24350/13]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | 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.

2:20 pm

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

In November 2011, when the ECB cut its interest rate, the Minister, the Taoiseach and the Minister for Public Expenditure and Reform, Deputy Brendan Howlin, brought the banks in and told them clearly that they must cut their rates. Initially, they refused, but as a result of the pressure the Government brought to bear, eventually, they did so. The Taoiseach said at the time that, if necessary, the Government would legislate to make the banks cut their rates. In the intervening period, we have seen mortgage arrears spiral out of control while bankers have been taking excessive pay. The banks have only responded on those two issues when appropriate pressure has been placed on them.

In the past, the Government showed some desire to fight the banks on these issues, but that desire has clearly waned among Ministers. Recent figures from the Central Bank show that while the ECB's main re-finance rate stood steady at 0.75%, the applicable Irish rate increased by 14 basis points. Those figures are from the period before the recent ECB cut of 25 basis points. In 2013, the same banks that refused to cut rates in 2011 are now refusing to pass on the ECB's interest rate cut yet there is not a whimper from the Minister, his party, Fine Gael, or the Labour Party. I note that while the Minister says he has no statutory powers in this area, he did not have them in November 2011 either when the Minister of State at the Department of Finance, Deputy Brian Hayes, said he was very disappointed and that it was pathetic that banks bailed out by the taxpayer should decide not to pass on the rate cut. In the aftermath of the meeting to which the Government summoned the bankers, the Minister said that the ECB had lowered interest rates to avoid recession and it was difficult to see why Irish banks should not follow suit.

The Minister is well aware that in the next two weeks tens of thousands of customers of AIB will see an increase in their variable mortgage rates. Will he repeat his 2011 comments and say that it is unacceptable and, as his Minister of State stated, pathetic that banks bailed out by the State are refusing to pass on interest rate cuts and, instead, are increasing their variable rates?

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The Deputy refers to November 2011, which was when the Taoiseach wrote to the Central Bank to ask if it was seeking regulatory powers to control interest rates. The Deputy Governor replied to the effect that the Central Bank was not seeking such powers and provided good and sufficient reasons for not doing so. The difference between the situation in November 2011 and now is that at that time, there was a high reliance by commercial banks on ELG funding from the Central Bank. The commercial banks are not dependent on ELG funds any longer and must be cognisant of the deposit base on the one hand and the cost of funding in general. We must protect the generality of Irish taxpayers who own two of the banks almost completely. The business we are in is always about choices. Why would 2.1 million taxpayers be penalised to protect a smaller group of people who have loans from the banks?

It is not true to say that interest rates have not been passed on in respect of mortgages. Of all Irish mortgages, 50% are trackers and those have seen reductions in the rate of interest applying. However, people with variable mortgage rates have experienced some increases in the last 12 months, particularly where they have loans with AIB, which is bringing its interest rates up to average that prevails in the market. The bank must go to the market to raise funds on deposits as well as to meet the cost of funding. I note that the rates being charged by the Irish banks are comparable to the rates being charged elsewhere in Europe.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
Link to this: Individually | In context | Oireachtas source

Can the Minister confirm that there is nothing to prevent him, the Taoiseach and the Minister for Public Expenditure and Reform from doing exactly what they did in November 2011, which was to call the heads of the banks in and ask why none of them has passed on the ECB rate reduction?

Is there anything to prevent them doing that or does the Minister support AIB fleecing its variable rate mortgage customers by absorbing the reduction in the rate and increasing the rate by 0.4% for over 70,000 customers in the next 14 days?

2:25 pm

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

We have very good formal relationships with the banks now. Contacts can be make quite adequately through officials in the Department of Finance, who are in constant contact with the banks. An interest rate is the price at which money is lent and the price contains a pricing in of risk. The banks must be in a position to arrange these matters commercially when they are no longer relying principally on funds supplied by the Central Bank but are in the market raising funds and where they get a large proportion of their funds from depositors. In that context, we want them to act commercially and we want the banks to be restored to full commercial health. The Irish taxpayer owns two of the banks completely and owns 15% of the third and we want the banks to be profitable again to protect the investment of Irish taxpayers. In due course I hope I, or one of my successors, will be able to recover the money from the banks by selling the shares in the banks and taking back what the taxpayer was forced to invest after the collapse in the banking system on the watch of the previous Fianna Fáil-Green Party Government.