What's all the fuss this week about Fianna Fail's mortgage Bill?
For more than a year Opposition parties have been campaigning against what they consider to be rip-off variable interest rates charged on home loans by Irish banks. Fianna Fáil tabled a Bill this week that would give the Central Bank of Ireland certain powers in setting rates. It's identical to a Bill that it tabled a year ago but was blocked by the Fine Gael-Labour Party government. The Central Bank doesn't want these powers, and Minister for Finance Michael Noonan has argued that the Bill could be unconstitutional. But the Dáil arithmetic after February's general election means Fianna Fáil's retabled Bill was voted through and now goes to committee stage for debate.
What's the problem with Irish variable mortgage rates?
Irish banks are charging up to 4.5 per cent interest on their standard variable mortgages. The euro-zone average is 1.99 per cent. The Irish banks argue that they have a higher cost of funding than banks abroad; a risk premium is built into Irish rates because of the recent property crash here and because it is hard for a bank to repossess a home in Ireland if a customer defaults. Banks also have to compensate for the many loss-making tracker mortgages that they wrote before the financial crash of late 2008.
Didn't Michael Noonan threaten to give the regulator these powers if the banks didn't lower their rates?
Yes, more than a year ago, but he never followed through on his threat. After he called for them to offer mortgage holders better value all of the banks made some move or other on their rates. AIB has cut its variable rate four times in 18 months, Bank of Ireland has offered lower fixed rates and a 2 per cent cashback offer for new customers that has been mirrored by Permanent TSB, while Ulster Bank and KBC have also lowered rates, offered cash to cover professional fees, or both. The Minister said on Thursday that he was happy with the banks' response and that he expects AIB, which is 99.9 per cent owned by the State, to lower its rates again.
Why doesn't the Central Bank of Ireland want the powers?
It argues that the best way to get lower rates is through increased competition, from new players coming into the Irish market. This is beginning to happen. The Australian group Pepper recently began offering home loans, and Frank Money is awaiting authorisation. The Central Bank argues that other potential new entrants to the market might be put off as a result of these powers being on the statute book.
Could this fuss about rates frighten off investors who might otherwise be tempted by a reflotation of AIB?
Potentially, but this would be tested only when the Government pressed the button on a reflotation. Noonan said recently that there is unlikely to be an Allied Irish Banks IPO until 2017, because of adverse market conditions. Lower interest rates mean lower profits for the banks, and analysts have estimated that AIB's recently announced 0.25 per cent cut in its standard variable rate would reduce its net income by €30 million a year. Investors might well ask questions about this come IPO time, but for now they seem to be interested in the Irish economic- recovery story, for which AIB is a good proxy.
What happens if the Bill becomes law?
If Fianna Fáil's Bill becomes law then the Central Bank will have powers to intervene on interest rates, but this does not mean it will ever exercise them. The regulator is independent of the State, so couldn't be forced to intervene, which could put it at odds with the will of our elected representatives in Leinster House. It's a situation that the regulator and the Government want to avoid. Fianna Fáil's finance spokesman, Michael McGrath, has left the door ajar for the banks to commit to cutting rates voluntarily rather than proceeding with his Bill, but there is no sign of that happening.
