Dara Calleary (Mayo, Fianna Fail)
Link to this: Individually | In context

Question 130: To ask the Minister for Finance if he has consulted the public interest directors in Bank of Ireland regarding the decision of the bank not to pass the ECB rate reductions on to mortgage holders; if so the outcome of those consultations; if not the reason for same; and if he will make a statement on the matter. [35969/11]

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

As the Deputy will be aware, under the terms of the Credit Institutions (Financial Support) Scheme 2008, domestic credit institutions benefiting from the State guarantee were required at the direction of the Minister for Finance to appoint up to two non-executive directors to promote the public interest. The legal position is that any director appointed to the board of the covered institutions, whether under the CIFS scheme or otherwise, is subject to the requirements of company law in the discharge of his or her responsibilities as a company director. As such, the director is legally bound to act in what he or she believes are the interests of the separate legal entity that is the institution itself. These are the director's so-called fiduciary duties.

I understand that in addition to their other experiences, the public interest directors currently on the boards of the covered institutions were nominated by my predecessor on the basis of the Minister's assessment of their civic mindedness and sense of where the public interest lies to inform their view of what was in the institution's interest. I am advised that the Department of Finance held generic briefing sessions on the CIFS scheme in general and on the fiduciary duties of non-executive directors for individuals on the panel from which the covered institutions appointed public interest directors but that there was no job description or scope of work set out for them as this, as I have outlined, was determined under company law. In addition, for this reason public interest directors did not have a formal reporting relationship to the Minister or to the Department of Finance.

In light of the foregoing and the scope for actual and perceived conflicts between the fiduciary duties of the directors of financial institutions under company law and the wider public interest in circumstances that those institutions have received huge financial support from the State, it was essential to bring legal clarity not just to the role of the public interest directors but to that of the entire boards of those institutions. Section 48 of the Credit Institutions (Stabilisation) Act, therefore, provides that the overriding duty of directors of the covered institutions relates to the public interest as set out in the Act. As Minister for Finance, I am strongly committed to ensuring that the boards of the covered institutions act at all times in a manner fully consistent with key public interest objectives for the banking sector. This will be a major element of my assessment of the board renewal programme.

The primary duty and responsibility of the public interest directors, as well as all the other directors, is to ensure that the institution on whose board they serve is run properly and appropriately. As I have indicated, because it would be inappropriate to do so, they do not report to the Minister for Finance or to the Department of Finance. Their responsibility under company law is to the institution on whose board they serve. I work with these covered institutions through the chairpersons of the boards and that is my point of contact. If I want to see the board or individual directors, I will meet the board in its totality. I will not pick out individual directors and call them in for some kind of reprimand when I do not have a legal leg on which to stand to make any suggestion to them whatsoever.

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. The Deputy will be aware that representatives of the banks were called in to discuss the situation in regard to passing on the ECB rate reduction to mortgage holders with the Economic Management Council, which comprises of the Taoiseach, Tánaiste, myself as Minister for Finance and Minister for Public Expenditure and Reform. I 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.

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 suasion use existing processes to engage with specific lenders which appear to have standard variable rates set disproportionate to their cost of funds.

In his report, the Deputy Governor states that, while the standard variable rates (SVR) of mortgage interest from Irish banks reached historically low levels in early 2009, several forces have contributed to the subsequent increases in such rates. Firstly, the access of the Irish banks to wholesale funding from the market was sharply curtailed, especially from mid-2010 and there was a sharp increase in the interest cost (including the guarantee fee mandated by the EU Commission) of what market funding was secured. Secondly, while the ECB policy rate is only .25% higher now than it was in 2009, the total cost to the banks of some of the sizeable drawings they have made on central bank funding (inclusive of guarantee fee) is much higher than the policy rate. Thirdly, the banks appear to have increased - at different times and to different degrees, the spread by which the SVR exceeds their cost of funds.

The Deputy Governor goes on to say that the third issue is the one on which the current debate is focused. He has indicated in his report that a somewhat wider spread of new loans could be rationalised on the basis of the bank's belated realisation of the credit risk that may be involved in mortgage lending (even though this can be limited by prudent loan underwriting practices, risk reduction mechanisms such as low loan-to-value and loan-to-income ratios.). A significant widening of mortgage interest rate spreads has also been happening in other countries. The Deputy Governor comments that it is less clear that retroactively applying a risk-spread to existing loans is fully consistent with fair practice, given that standard variable rates have, in the past, generally moved broadly in line with the cost of funds, and given the current situation where most borrowers have limited alternatives such as refinancing or pre-paying.

In his report, the Deputy Governor states that the Central Bank has two concerns. The SVR contract has operated for decades during which the reasonable assumption has been established that it would generally track the cost of funds to the lender. The exercise of the currently heightened market power by some banks in increasing rates for existing SVR borrowers would be an abuse contrary to public policy. Secondly the Central Bank comments that from the point of view of prudential and consumer legislation, it is possible that the deleterious effect on the mortgage arrears situation arising from large increases in the SVR could result in a net worsening of the banks' prospective profitability, while at the same time adding to the financial difficulty of hard-pressed homeowners.

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 as requested by the Deputy. The Deputy Governor has also mentioned that competition policy issues may arise in this area. I will bring a copy of his letter to the attention of my colleague, the Minister for Jobs, Enterprise and Innovation, for any further requirement in this regard.

Dara Calleary (Mayo, Fianna Fail)
Link to this: Individually | In context

Question 131: To ask the Minister for Finance if his attention has been drawn to the decision of Bank of Ireland to change its method of calculating interest rates on term lending facilities from the current Euroibor-Euro interbank derived reference rates to a reference rate based on bank cost of funds; if his further attention has been drawn to the fact that this change will result in substantial interest rate increases for small business; if he has consulted the public interest directors regarding same; and if he will make a statement on the matter. [35970/11]

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

As the Deputy may be aware, this issue was the subject of a topical issues debate in the Dáil put down by his colleague Deputy Niall Collins on 15 November last. As the Deputy is aware, 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, I have no statutory function in relation to business interest rate decisions made by individual lending institutions at any particular time.

I do appreciate that this increase will be difficult for some business customers to absorb. As I understand it, 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.

On the general issue of interest rates, the Financial Regulator and Deputy Governor of the Central Bank stated in his report of 11 November 2011 to the Taoiseach on the issue of passing on mortgage interest rate adjustments following ECB actions, the power to exercise close regulatory control over retail interest rates is not sought by the Central Bank. Similar principles apply in relation 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 bail-outs.

The public interest directors do not report to me or to the Department of Finance. Their responsibility under company law is to the institution on whose board they serve. I work with these covered institutions through the chairpersons of the boards and that is my point of contact. If I want to see the board or individual directors, I will meet the board in its totality.