Brendan Griffin (Kerry South, Fine Gael)
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Question 64: To ask the Minister for Finance his views on a matter (details supplied) regarding the calculation of interest; and if he will make a statement on the matter. [36541/11]

Michael Noonan (Limerick City, Fine Gael)
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As the Deputy may be aware, this issue was the subject of a topical issues debate in the Dáil put down by 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.