PERMANENT TSB is the first Irish-owned bank to break ranks on mortgage rates, putting up its variable rates by half of a percentage point. The move has provoked understandable public anger given the level of support extended to the banking sector by the State and the lack of any upward move in underlying ECB rates to justify the increase. The other banks are keeping their powder dry for the time being, but the expectation is that they will follow suit.
While it is unpalatable, the banks desire to increase rates goes beyond mere profiteering and serves to underline both the depth of the problem in the Irish banking system and the unpalatable truth about who will bear the cost of repairing the damage.
In truth the decision has already been taken that the tax payer will foot the bill. It was made back in September when the Government guaranteed the banks. The debate since then has really been one of how we will actually pay. Higher interest rates are an inevitable part of that equation given the approach adopted by the Government.
The two central tenets of the Government’s effort at restructuring the banks has been to avoid outright nationalisation while trying at the same time to put as little money as possible into the banks. The contradictory nature of these goals is the product of political pragmatism, some decidedly fuzzy economic thinking and the constraints imposed by the limited borrowing capacity of the State.
The upshot of it all is that the Government is committed to giving the banks cash, but wants them to raise as much as they can from other sources first. The banks can really only get money from one of two places; profits and new investors. And the latter will only invest if they think the former will be regular and substantial.
Despite yesterday’s chest thumping, the Government has engineered a situation in which it needs the banks to be strongly profitable in order to minimise the amount of capital it has to inject into the system and thus the amount it must borrow and in fairness ultimately raise in taxation.
The consequences of this are now becoming apparent as mortgage rates go up, but in truth they have been bubbling under for months. Despite ECB rates falling to record lows the banks have not passed on significant reductions in overdraft rates, term loans and credit cards. All of this means more profit for the banks.
It should not come as any surprise then that the banks are now seeking to push up mortgage rates. Public anger against the banks very rarely translates into lost customers. And with the Government in effect complicit the only downside for the banks is the wider consequences of their actions on the economy as more money is drained from households.
But if the events of the last 10 years have shown anything it is that long-term thinking is not part of Irish banking mindset. And this week’s move by Permanent TSB would indicate that despite all that has gone before, that culture remains largely intact.