Thursday, 16 April 2015
Topical Issue Debate
Mortgage Interest Rates
I welcome the Minister for Finance, Deputy Michael Noonan, to the House and thank the Ceann Comhairle's office for selecting this Topical Issue for debate. It concerns a hugely pressing issue for hundreds of thousands of households in this country. As public representatives, we must always seek to convert statistics and figures to give us a sense of how they impact on people. The Minister understands that better than anyone. It is what politics and fairness are all about.
Deputy Michael McGrath introduced a Bill in this House on 31 March concerning the standard variable rate being applied by the banks to residential mortgage accounts. That debate was very important. Deputy McGrath highlighted that Allied Irish Banks which, together with Bank of Ireland, is one half of the duopoly of pillar banks, has 130,000 variable-rate mortgages, Permanent TSB has some 80,000 such customers, and Bank of Ireland has approximately 70,000. AIB is charging, on average, a variable rate of 4.15% on its mortgages, while Bank of Ireland and PTSB are charging, on average, 4.5%. However, the current eurozone average for variable standard-rate mortgages is 2.5%. In other words, these banks are charging a shocking and extortionate rate of almost 70% more than the eurozone average. That is not right.
The two main banks should not be allowed to retain a duopoly hold over the nation in respect of loans they advanced into the credit pyramid and bubble they created. I have in front of me figures which illustrate the calculable culpability of all the banks by reference to their funding models, as they call them. In fact, there is no such thing as a funding model. Rather, there are funding principles, because the principles of banks funding their assets are determined by bank boards. Unfortunately, that issue is not even being addressed in the banking inquiry, which is a shocking indictment of the approach being employed. By referring to the banks' balance sheets, which are the financial evidence of what the bank boards decided as policy, over the seven years from 2001 to 2008, we see there was a reckless departure from 90% loan-to-deposits ratios to a 173% weighted average. That was wrong. It is wrong that people who have the legacy loans from that era are being forced to pay an extortionate super-profit margin above the normal new loans margin.
Today I took a walk to visit some the nearby branches of the main banks. AIB on Lower Grafton Street has a sign emblazoned above its door advertising a mortgage awareness day which took place on Saturday, 21 March 2015 from 10 a.m. to 3 p.m. There is a great deal of irony to contemplate there. By God, that bank's variable standard-rate mortgage holders are very much mortgage aware. In the case of Bank of Ireland, there was an advertisement showing a house and the text: "Need to move? We pay your stamp duty to the value of 1% of your mortgage." Of course, there is no mention that this 1% will only apply, at most, to 80% of the cost of the property. That is another illusion, a lie to tempt people innocently into tying themselves to Bank of Ireland, as the bank describes it, "for small steps, for big steps, for life". The bank's 80,000 standard variable-rate mortgage holders certainly are in it for life, paying a 2% super-profit over eurozone rates for a euro loan. That is simply wrong.
The Minister must bring the banks to heel on this issue. Bank of Ireland, in particular, is out of control. Until nine months ago, its board of directors included an individual who made a profit of €500 million from his small investment of €350 million, which was a one-way bet into profit. He has since gone back to America. It is instructive to consider the backgrounds of the 12 remaining directors. The governor is British and has mainly been involved in the Lloyds Banking Group. Kent Atkinson is also British and previously with Lloyds TSB. Next we have Richie Boucher, who spent a lot of time at the Royal Bank of Scotland. Pat Butler was in the resolution group in McKinsey & Company. We have Tom Considine, a former Secretary General of the Department of Finance, former member of the advisory committee of the National Asset Management Agency and a former board member of the Central Bank of Ireland. James Herron is British and formerly of Invest Northern Ireland. Andrew Keating is only a young man but formerly worked with Ulster Bank. Patrick Kennedy, like Pat Butler, was formerly with McKinsey & Company. John Moran, like Tom Considine, is a former Secretary General of the Department of Finance. Davida Marston is another director who is British. My point is that most of these people have no empathy for or understanding of their Irish customers, yet they are the men and women who decide the policy of the bank and decide what the variable rates will be and if and when they are changed.
Bank of Ireland reported a profit of €1.1 billion in 2014, which followed a loss of €1.7 billion the previous year.
I understand the rules, Acting Chairman, but this is an issue of national importance. In the space of a year, the bank turned a loss of €1.7 billion in 2013 into a profit of €1.1 billion, a turnaround of €2.8 billion. The Minister knows well that this is all to do with the manipulation of provisions. It is not to do with the health of the bank or its normal operating profit. The same applies in regard to AIB. All of this is seriously wrong and we must be courageous and honest about it for the sake of the Irish people whose lives are being impacted by it.
Some 300,000 mortgages equate to approximately 1 million people. Therefore, the issue needs to be addressed.
I thank the Deputy for raising this important issue. As he is aware, the statement of Government priorities 2014-16 recognised the need for competition in the banking sector to put pressure on banks operating in Ireland to reduce the interest rates charged. This issue was also discussed in the context of a Private Members' motion brought forward in the House just before Easter. It has also been the subject of a number of recent parliamentary questions.
I met the Governor of the Central Bank, Patrick Honohan, on 2 April to discuss the issue. The Governor provided me with an update on the ongoing work he and his officials were carrying out on the issue of the standard variable rates, SVRs, charged by the lenders. At the meeting we spoke about the fact that the SVRs charged in Ireland were higher than those charged in other euro area countries and had not fallen in line with ECB wholesale rates. The Central Bank will continue to research why this is the case and will publish results shortly. The Governor will update me on progress in due course.
As the Deputy will be aware, it is a commercial matter for each lending institution to determine the rate it charges its customers, depending on a number of factors such as cost of funds and commercial considerations such as competition, risk pricing and the impact on deposit rates. However, the Government expects, as the cost of funding for the banks reduces, this to be reflected in the interest rates charged to both new and existing customers.
As the Deputy will also be aware, the Central Bank has no statutory role in the setting of interest rates by regulated entities, apart from the interest rate cap imposed on the credit union sector in accordance with the provisions of the Credit Union Act 1997 and the requirement to be notified of penalty or surcharge interest imposed in respect of arrears. Nonetheless, as I have said, the issue of regulation of interest rates remains a policy area under active review and has been the subject of recent correspondence between the Department of Finance and the Central Bank. The current position is that the Central Bank does not have new proposals for the additional regulation of interest rates.
The Governor of the Central Bank, in his opening statement to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform last November, stated that in Ireland, as in most advanced economies, it had long been understood tight administrative control over the rates charged by banks would be counterproductive in ensuring a sufficient flow of properly priced credit on a lasting basis. Such control would strongly discourage new entrants when, in fact, ongoing competition in the banking sector will be crucial in ensuring the economy is provided with efficient and cost effective banking services. In this regard, there have been some movements on mortgage interest rates of late by a number of institutions which suggest the market may be entering a new and more competitive phase.
The Central Bank (Supervision and Enforcement) Act 2013 introduced changes to section 149 of the Consumer Credit Act 1995, which regulates fees and charges, in order to attract new entrants to the Irish banking sector. There is some evidence of improvements in the banking sector, with a number of institutions introducing new products and adapting their business models. In the past 12 months there have been a number of new entrants to the Irish mortgage market, bringing additional and welcome competition to the sector. While not an option for all borrowers, those who are in a position to move mortgages should look into their options to do so. The banks must be convinced that they are at risk of losing customers if they persist with SVRs higher than what is available to customers in other banks. The Competition and Consumer Protection Commission's website at consumerhelp.iecontains useful information on the process. It also contains comparisons of mortgage products and information on incentives institutions will give to encourage switching.
As set out in the statement of Government priorities 2014-16, supporting increased competition in the banking sector is essential to put downward pressure on interest rates. Increased competition between existing and new entrants will have the effect of reducing prices to consumers, which in the mortgage sector means reducing the SVR.
In case I was muddled in my initial contribution, I wish to clarify that AIB reported profits of €1.1 billion for last year, as against a loss of €1.7 billion for the previous year, a turnaround of €2.8 billion. Similarly, Bank of Ireland reported a profit of €920 million in 2014 and a loss of €500 million in 2013, representing a turnaround of €1.5 billion. We have two banks in a duopoly with a turnaround figure of €4.3 billion, set against the reality of customers being being insulted, in operational terms, by them. I have first-hand experience of this. I am a former commercial banker in a State-sponsored bank for businesses, small and medium enterprises, a worthy bank that understood the principles of banking and kept really close to its customers. What is happening now is that the banks are becoming remote. I gave as an example the board of Bank of Ireland. Four members are foreign, while the remainder, bar two, have all had experience working outside Ireland. They are remote and unfeeling. I do not mean that they have to be lovey dovey, but in the sense of having a heart, they are out of touch with households and those in jobs and who work in businesses. It is not right.
The last bank I passed by was a branch of PTSB. An advertisement displayed read as follows: "Ready to buy your first house? Yes, give me a debt! Permanent tsb back to basics". Given what has happened, that is the philosophy, if it could be called that, the three banks should not be allowed to have. I will give the Minister the paper to which I referred and which I sent to the Chairman of the banking inquiry. The evidence shows that it was banks' boards and auditors who were clearly at fault. We do not need the processional. Does the Minister remember in May last year that there was a proposal to have in the terms of reference that every member of every board from 2001 to 2008 should be required to be in attendance in the one place to listen to the reports on their own accounts and their own financial engineering and the lack of principles during those eight years, with the auditors sitting behind them, in order that the people of Ireland would be able to see how a credit pyramid grew, which went out of control in terms of the figure for domestic banking in Ireland growing from three times to more than five and a half times national income? That was unacceptable and so wrong but nobody has said so formally in this House. I say it again - it is so wrong that this fact has not been understood and it needs to be. Advertisements such as the one mentioned, given what has happened, should not be allowed to be placed at the entrance doors to banks.
The banks are selling loans, spanning 30 years, to financial funds in the American markets, denoted in dollars which is a strong currency, which are mopping them up. Those who will be paying monthly instalments for 35 years do not realise their payments are being channelled and funnelled through the financial markets to funds which have bought their loans.
I ask for the Acting Chairman's forbearance to make one final point. The loan my wife and I took out with one of the duopoly banks was securitised, without much notice. We received a little note on it in the post and, as I had a lot of experience of banking, I knew what it meant. When we paid off the loan in full, the bank was unable to find the title deeds to our house because as a result of securitisation the loan had been channelled through funny vaults. They were found eventually, but that is wrong. That is what happens, however, when the relationship entered into for 35 years does not continue with the same institution for the 35 years. It is nothing personal, but I hope the Minister understands.
I thank the Deputy for his comments. Some of the issues raised in his second intervention will I hope be addressed by the banking inquiry. He delved into very important but more general issues than variable mortgage rates. As I said, the Governor of the Central Bank informed me that work had commenced in the Central Bank on this very issue. It is establishing the fact based position in terms of what level of margin is excessive. Very shortly, when that analytical work has been completed-----