Someone should probably remind Taoiseach Simon Harris that the Government does not own the banks any more. In the years after the bailout, the customary kicking around of the financial institutions – and didn’t they deserve it for all that went on – was underpinned by the State shareholdings in the sector. The banks were ostensibly setting their own policy, but with Government appointees on their boards and big official stakes, the boards were looking over their shoulders. Now, as the shareholdings dwindle away, the game has changed, though Harris no doubt felt that a bit of bank-baiting was no harm in an election week.
In response to the summons from Harris this week to meet him, the banks could now quite easily say that they are washing their hair. They won’t, of course. But it will be interesting to see whether they front up along the lines of a statement from their representative body, the Banking and Payments Federation (BPFI), which pointed out – without mentioning the Taoiseach – that they had not increased their variable and fixed rate offers to match the European Central Bank rises, and in any case were legally barred under the competition law from giving any signal in advance of time of when they might do so.
The Taoiseach has said he wants “assurances” that they would cut interest rates to match the ECB decline – the banks say that if they do this they will have the Competition and Consumer Protection Commission (CCPC) calling at their door, as they cannot give such signals, either publicly or privately.
It would be nice to think that there might be a row when Harris meets the bank bosses, though more likely – with Friday’s elections past and the banks preferring a quiet life – we will get some meaningless statement about the discussions going well and everyone agreeing to work together in future, along with some background briefings to the media from Harris about how he laid down the law. The extent to which the bank chiefs themselves go public to make their case, as opposed to letting the BPFI do it, will be interesting to watch.
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Irish banks have been making big profits – and, fortunately, this is now attracting some new players to offer better loan and deposit deals. Someone else starting to eat their lunch is what will persuade the banks to move – not a summons to Merrion Street.
The reality is the following. In general, the big banks have been keeping their profit margins up by offering a low return deal to savers. This has allowed them to keep their mortgage rates down as the ECB has hiked rates – apart from tracker rates, which adjust automatically. So savers have been effectively subsidising borrowers, even if this is partly their own fault for leaving spare cash in demand deposit accounts.
Apart from tracker interest rates, other mortgage rates did not go up anything like as much as the ECB increases – and so will not fall in tandem. Nonetheless, already over the past month or so, some mortgage interest rates have reduced in reaction to money market trends and as competition in the market shows some welcome signs of reviving. And it is this threat to profits which will persuade the banks to move.
Tracker rates will fall automatically as the ECB cuts. The call from Harris for other variable interest rates to fall ignores the fact that they didn’t go up by much. These non-tracker variable rates are of limited importance now, applying to just 15 per cent of loans – generally older mortgages with lower balances. With standard variable rates from the two biggest lenders at about 4 per cent, it will require further ECB reductions before there is scope for them to fall. Others charging higher variable rates will have to cut anyway, or just don’t want business in this area.
Government banking policy remains important, of course. A stable environment can help to encourage new entrants
Meanwhile, new competition and the downward trend in market interest rates has led to an improvement in the fixed rate offers available to new borrowers and to those whose existing fixed term is running out. Many can now fix at 3.5 per cent to 4 per cent. With the ECB deposit rate now at 3.75 per cent, this is probably as good as it is going to get for a while – the best we could hope for is that these offers could edge lower as the year goes on and into 2025. There are also some bad deals still out there for those wanting to fix, though most could get a lower rate by switching lender. And more people doing this is the key to competition.
Instead of wasting his fire in this area, it would be better for the Taoiseach to turn up the heat under some of the nonbank lenders who manage loans for investment funds who bought them from the banks in recent years. Many of these mortgages had been non-performing loans – and these entities did, in many cases, hike rates in tandem with ECB rises and are now charging 7-8 per cent or more. Because of a poor credit record, the borrowers involved often cannot switch. There are sweet profits here being earned on loans that were bought below face value.
Government banking policy remains important, of course. A stable environment can help to encourage new entrants. The State and the Central Bank as regulator have a role in ensuring the continuation of cash services and branch operations and of rules that apply when borrowers run into trouble. Banks can legitimately be asked about their record on innovating products and customer service delivery. The sector’s lending remains circumscribed by rules and red tape imposed after the “light-touch” regulation era before the crash, and there are important longer-term strategic questions here.
But to fall back on the old route of “calling in“ the banks to demand they cut their interest rates is performative politics. If, as the Taoiseach says, he wants to “understand” the options facing those whose fixed rate term is ending, he can call up what is on offer on a range of comparison websites. Unfortunately, those who typically fixed at interest rates of about 2.5 per cent in recent years will face an increase as their fixed term ends – in better news, the offers are improving, and most should be able to fix again in the 3.5 to 4 per cent range. Nothing the Taoiseach can say or do is going to make any difference to this.