Minister for Finance Michael Noonan will complete his meeting with bank chief executives today and will presumably make some statement about the outcome of his talks. A report on the cost of standard variable rate mortgages, which has been compiled by the Central Bank, may also be published. The indications are that the banks may slowly start to move on mortgage rates, though what precise form this will take remains to be seen. Standard variable mortgage rates are too high. As the banking market starts to normalise, the banks should have reduced their rates by now, given the generally low interest rate environment.
The Central Bank report makes this point, and refers to the danger to the banks of a political response if they do not act in the near future. What that political response might be is not clear, although Mr Noonan does have options, even if he would prefer not to have to use them.
There are some points needed to put the argument in context. The banks all have large books of tracker mortgages, on which customers are paying rock bottom rates, a point also underlined in the Central Bank report. The Government also needs the banks to be profitable, particularly in the case of AIB, on which it hopes to start selling down its shareholding late this year or early next year. Falling lending rates may also, in some cases, mean a drop in returns to savers, via lower deposit rates. All that said, it is unreasonable to expect existing standard rate mortgage holders to have to pay so far above European norms. Apart from Permanent TSB, the banks are now back in profit and their cost of funding has fallen. In this environment, the margins they are making on standard variable mortgages are unreasonably high.
Government interventions, which go beyond urging the banks, can be hard to target to achieve the right result. Of course politics are at play here. With a general election in the offing, the Government is keen to get a “win” and to be seen to persuade the banks to offer a better deal to customers. The fact that Minister Noonan is calling in all the main lenders suggests he feels something can, indeed by achieved. The indications are that this might come through a mix of cuts to standard variable mortgage rates along with the option for existing mortgage holders to move to competitively priced fixed rate mortgages for a period of years.
The banks may feel they are being unfairly treated, particularly as in overall terms their profit margins are probably not excessive. But they should have realised by now that their standard variable mortgage rates are simply too high. Sustainable business models involve being fair to customers and there is a manifestly undue burden on existing standard variable mortgage holders. The banks should offer them a better deal.