Gerry Adams (Louth, Sinn Fein)
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Question 101: To ask the Minister for Finance the steps he has taken to address the failure of the Irish banks to pass on to mortgage customers cuts to interest rates by the European Central Bank. [34296/11]

Michael Noonan (Limerick City, Fine Gael)
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Neither the Central Bank nor I, as Minister for Finance, have a statutory role in the setting of interest rates charged or paid by financial institutions regulated by the Central Bank. While I want to welcome the decision by the majority of lenders to reduce their standard variable rates following the recent announcement by the ECB, I would encourage all lenders to follow suit. Such a reduction will be of benefit to homeowners struggling with mortgage payments. The Government wants the lending institutions to pass on the interest rate cut for a number of reasons. In particular, the interest rate cut will be of assistance to those mortgage holders who are struggling to pay their mortgages.

Following a request from the Taoiseach, Mr Elderfield, the Deputy Governor of the Central Bank, forwarded a report regarding mortgage interest rates on 11 November 2011. The Deputy Governor acknowledges that the Government is not unjustified to have concerns for some particular banks regarding the widening of the spreads by which their standard variable rate (SVR) exceed their cost of funds and how they are still so far above the prevailing rates of their industry peers. However, the Deputy Governor states that the power to exercise close regulatory control over retail interest rates is not sought by the Central Bank at this time. He has indicated that the Central Bank will, within its existing powers and through persuasion use existing processes to engage with specific lenders which appear to have standard variable rates set disproportionate to their cost of funds.

The Deputy Governor has indicated that experience of interest rate 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 Deputy Governor 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 bail-outs.

I welcome the report from Mr Elderfield which will be examined to see what further action, if any, is required. My initial reading of his report is that the Deputy Governor is not seeking emergency legislation. Taking into account the advice of the Central Bank, I do not intend to recommend to Government to introduce emergency legislation.