The Republic’s retail banks, bailed out by taxpayers and overseas parents following the property crash, seemed determined to have a good Covid-19 crisis.
While the industry in March committed, following talks with Minister for Finance Paschal Donohoe, to three-month payment breaks on household and business loans, in reality, most had already earlier promised they would offer payment pauses. It was seen as a win-win for the banks. Being among the first in Europe to offer such relief would go a long way to restoring trust in an industry still – rightly – scarred by the legacy of the Celtic Tiger years and tracker mortgage scandal. But it also avoided an immediate fresh arrears spike as the country headed into lockdown.
There were teething problems. There were anecdotal reports of front-line bank officials in the early days not on message that this was not a standard moratorium, requiring proof of employment and information on savings. The breaks were essentially to be offered to anyone reporting financial difficulties as a result of Covid-19.
When banks set up the payment breaks, they were keen to ensure they would not affect borrowers’ credit ratings or how the loans were accounted for on their books. To do this, they looked to 2014 EU banking rules providing that if interest isn’t being accrued on a loan, it is taken as a borrower’s unlikeliness to pay – tipping them into default territory. So the banks decided to continue to apply interest. European regulators clarified this week that special Covid-19 payment breaks allow for the accrual or non-accrual of interest, without triggering default. However, the main banks have said that they will continue to apply interest.
Goodbody Stockbrokers estimates banks would lose €150 million if they waived interest on 70,000 mortgages subject to payment breaks for six months. And price comparison website Bonkers.ie says that applying interest would add €4,300 to a €300,000 mortgage with 30 years to go. Either way, there is a cost. Who should pay? Borrowers ? Other customers? Or taxpayers, who continue to hold large stakes in the main banks?