We now come to the second item on the agenda, the resumed discussion on the European Commission White Paper on the integration of EU mortgage credit markets, COM (2007) 807, with the Irish Financial Services Regulatory Authority, the Irish Banking Federation and representatives of the Department of Finance. I again remind witnesses that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before it, as members of the committee are fully aware. Representatives from Irish Financial Services Regulatory Authority, the Irish Banking Federation and the Department of Finance are present. Mr. Kelly of Financial Services Ireland is unable to attend and has sent his apologies to the committee. If members have any questions specifically for Mr. Kelly, we can deal with them in writing or he may have an opportunity to appear before the committee again. The area of credit rating, lending and borrowing criteria, and all that goes with it, is particularly important in today's high-tech world. It might be no harm to have a short résumé of last week's presentation. Ms Eimer O'Rourke, head of retail banking of the Irish Banking Federation, will oblige.
EU Mortgage Credit Markets: Discussion (Resumed).
Ms Eimer O’Rourke
If I had realised the meeting would take place in this room, I would have been able to provide a soft copy of the presentation which would be more appropriate to the topics I propose to discuss. I will pick up on three themes which emerged in the questions posed during our meeting last week, namely, the further enhancing of the competitiveness of the Irish mortgage market, the position of Ireland's mortgage market in the European Union and the need to equitably balance stakeholders' needs.
We have already identified the competitive nature of the Irish mortgage market. Two areas in which competitiveness could be further enhanced are e-conveyancing and e-payments. The White Paper is likely to result in a recommendation for on-line land registration. We noted in last week's discussions on land registration and e-conveyancing the comparisons which can be made with newer EU member states whose systems have evolved more recently and are already technology embedded, delivering speed, transparency and reliability. Equally, in Scandinavian countries, it is normal to be able to register a property transaction within a day or two of it taking place. The World Bank report ranked Ireland eighth overall out of 178 economies for ease of doing business. but only 72nd in terms of our ability to register property, a major discrepancy.
It is important that e-conveyancing initiatives are prioritised by the Government and all public representatives. A number of separate initiatives are being rolled out, for example, the successful e-stamping project in the Revenue Commissioners. It is time to ensure we have central co-ordination in driving these projects.
On a related issue, we were asked during the previous meeting about customer mobility and the cost of switching. The data we presented at the previous meeting shows that approximately 20% of mortgage borrowers switch from one lender to another. The bulk of the costs for the consumer arising from switching is split broadly between legal fees and those payable to the State, for example, to the Property Registration Authority. The requirement to pay stamp duty on the registration of the mortgage has been removed, which is a welcome development in the switching market. However, the efficiencies that can be achieved through e-conveyancing could reduce pressure on switching costs.
The other aspect of enhancing competitiveness is in the area of e-payments - this is the reason I am embarrassed we provided our document on paper when we should be using technology. The pie chart in the hard copy shows that while approximately 21% of our non-cash transactions are cheques, when considered in value terms, this figure rises to approximately 78%. Ireland, the United Kingdom and France are the only countries in the European Union where the use of cheques is significant. In addition, Ireland is a significant user of cash and compares unfavourably in this respect with our EU counterparts. For example, the average, annual per capita cash withdrawal from ATMs in 2006 was in excess of €5,000 compared to an average across the euro zone of €2,000. Irish people, therefore, use much more cash than their counterparts elsewhere. To return to the White Paper, how can we have an integrated mortgage market if people cannot make repayments across borders in an efficient manner. Given that cash and cheques do not cut it, we need other mechanisms.
E-payments are very important and are being promoted with particular emphasis throughout the European Union. The payment services directive adopted last year will be transposed by the end of next year and SEPA, the single euro payments area, continues to focus on electronic payments. In other European Union states, Finland and the Netherlands for instance, significant strides have been made in this area. The continued use of large volumes of cash and cheques instead of more efficient forms of payment is costing the economy a significant amount. IPSO, the Irish Payments Services Organisation, estimates this cost is in excess of €1 billion per annum. This feeds through to higher taxes and costs for firms.
We were asked on the previous occasion why costs arise for cash handling. Essentially, those additional costs arise from a number of factors. Notes and coins are expensive to mint and notes in particular have a short life span. Cash makes money laundering easier and perpetuates tax evasion and the black economy. Cash security and transport are expensive and they pose risks to the people who work in banks, shops etc. The widespread holding of cash by individual consumers puts them needlessly at risk. The Government has a direct role in considering how it makes and receives payments but more broadly it is important for public representatives to continue to support an e-payments strategy in Ireland. They are two things that can really help in that regard.
Ms O'Rourke stated that cash facilitates money laundering to a greater extent. Would it not be true to say that modern technology makes it easier for money launderers to operate also given the experience we have had in recent years whereby major banking personalities appear to have been able to infiltrate and manipulate the system with impunity and continue very dubious practices, which in some cases were hugely beneficial to themselves but in other cases were hugely negative from the point of view of the banking fraternity?
Ms Eimer O’Rourke
There are probably a couple of angles. Cash facilitates money laundering by virtue of the fact that people with cash can move outside of the system and can move around in the black economy with laundered funds. Transactions through the banking system and electronic transactions are the easiest to detect and monitor. Most of the emphasis on the third money laundering directive that will be transposed here in the course of the next year is on transaction monitoring and picking up on suspicious or unusual transaction patterns of activity. That is highly dependent on the systems working effectively.
I do not wish to monopolise the discussion as I am sure members will have something to say. However, we all know about the major cases and a French bank ran into difficulty recently also. Was cash the modus operandi or were electronic transfers involved? Much activity took place to be able to achieve the profits that were achieved - or losses as they turned out to be - but the integrity of the banking system was shown up to a huge extent. I am curious about which method was used because whatever the weaknesses are they should be readily identifiable and the White Paper should be dealing with them.
Before Senator Quinn speaks I wish to refer to another area. Ms O'Dea referred to a different area relating to the whole banking order. Ms O'Rourke is talking about service to the customer, which is important, and making the system more accessible and competitive. However, there is also the question of the integrity of banking, how it operates, how it affects the economy of the respective countries in which it operates and how because of the existence of the European Central Bank, interest rates and general lending rates should apply. Amazingly, we now seem to be able to have credit controls in individual member states to suit the occasion. It appears that these were missing at a time when perhaps action could and should have been taken because otherwise we would not have the kind of financial crisis that is looming or is already in existence, depending on one's perspective.
I apologise for moving on to a topic that is not directly related but I am fascinated by e-payments and cashless payments in Ireland. Last December the European Commission found that MasterCard was in breach of European regulations by the interchange fee that it was applying to cross-border transactions. The Commission was only interested in cross-border transactions. Visa has been told to get its house in order also. Does Ms O'Rourke have any comment on the matter? The large hidden charges in the interchange fee that retailers in particular have to pay have now been found to be against the European rules. The same practice is evident in the United States. Is this partly why we in Ireland are rather slow to move to an e-payment system? Is it because of the interchange fee charged which has been found to be illegal rather than unconstitutional?
Ms Eimer O’Rourke
I do not know enough about the specifics of the case but am somewhat familiar with it. It goes without saying that there is a very significant need to incentivise efficient and cost-effective payments. Whether this should be achieved through the restructuring of the charges currently in place or through other means, I am not entirely sure. However, we definitely need more efficient payments. Achieving transparency probably constitutes the best method.
I have listened to Ms O'Rourke's contribution. Is it not true to state we are entering a regime of impersonal banking in which there is no respect for the customer who is regarded as a number? Banks do not like small clients coming in with small amounts of money and the bigger banks claim transactions of this nature are a matter for the credit unions. The system is technology-driven and the client at the bank counter is ultimately seen as a nuisance. European banks that have acquired banks in Ireland have closed down profitable branches. They analysed the number of customers in those branches, determined their total value to them and decided they would make as much money from one big customer in Dublin or Galway, thus obviating the need for the smaller ones. Is this not sad? Respect for the individual entering a bank has diminished completely.
Ms Eimer O’Rourke
I would not agree.
As a consumer, I know it.
Ms Eimer O’Rourke
Every business must operate in an efficient manner. I draw the Deputy's attention to the purpose of the Irish Banking Federation, that is, to foster the development of a dynamic, innovative and stable banking and financial services industry that contributes to the economic and social well-being of the country. This is trying to reflect the fact that we have what we consider to be a relationship banking model. The model is such that we seek to look to the wider environment and the individual and try to balance the needs of the various stakeholders within that environment. It is challenging and always will be. However, it is not fair to say the system is completely unbalanced. There are balances that constantly need to be achieved.
I am a very small account holder by comparison with some of the wonderful people who live on this island. Having been in business and in politics for more than quarter of century I note that when a client goes into a bank today to do business, his or her well-being, operations, or future are of no concern. One could be at home at 9 p.m. sitting down watching the news and get a call from some wonderful anonymous person in a bank asking whether one has five minutes to discuss one's account. This is an outrageous invasion of privacy and shows disregard and a lack of respect for clients. It is no way to treat any customer of any institution, particularly a bank. The relationship should be personal and mutual.
Ms Eimer O’Rourke
All businesses must seek to perfect the relationship with their customers and manage it as best they can. None of us is perfect and we must all find a way to perfect relationships. It is important to note there are regulatory restrictions determining when one can call customers. The regulator is probably better equipped to discuss them in detail. There are restrictions on when staff can call customers and it is sometimes difficult to match the needs of the customer with those of the institution in a busy environment.
Mr. Paul O’Connor
On Deputy Noel Treacy's comments, certain banks entered this jurisdiction and established branch networks that did not operate previously. The process therefore works both ways. All the research shows that good service sells. This is a fundamental reality of the banking business. Banks invest substantially in the good service model. I do not know if this has been the Deputy's experience. As Ms Eimer O'Rourke mentioned, there is a switching code in place that gives the consumer the choice to walk to another bank in the easiest possible manner. All the consumer's standing order or direct debit arrangements are transferred automatically within a defined number of working days to facilitate choice.
Is that a one-way ticket?
Mr. Paul O’Connor
No, it is not.
There would not be a great welcome, when one returned it, after a while.
Mr. Paul O’Connor
With regard to the business of banking, wholesale deposits are wanted from small and big customers. There is a great deal of competition for retail deposits. The banks will welcome deposits, regardless of size.
Speaking of deposits, how stand the bridging facilities in banking? This is a serious question. I have found very much in the past few weeks that clients of mine cannot get bridging finance.
In addition, within the last few weeks a situation has developed regarding those who maybe over-borrowed. If the circumstances have changed and he or she is no longer able to pay the mortgage for whatever reasons, agreement may be reached with the bank whereby it takes a loss. However, it will decide to black the individual's credit rating while the house is voluntarily sold. Then another financial institution may fail to provide funding at a time when the property is on the market and the sale is going nowhere.
I will endeavour within this committee to make a recommendation in respect of the White Paper. If financial institutions lend unwisely, their right to repossession should be carefully looked at. There has to be responsibility. While the banks are responsible to their investors, they have also responsibility, individually and collectively, to the integrity of the banking system. I am not so sure that this always manifests itself in the way that we, as consumers and Oireachtas Members, would like to see happen. This is not just anecdotal, because Deputy Noel Treacy has mentioned things that are happening on the ground at present, whereby when a squeeze comes from all directions at the same time, many consumers are left high and dry. I wonder how the banking institutions believe we should proceed in the future.
The banking crisis that started in the US and moved across the Atlantic to the UK and, to a certain extent, to the rest of Europe could have been avoided if the proper criteria had been followed. Instead of going for broke and seeking to reach the top of the ladder in the shortest possible time, we could have had many years of solid stable growth in the economy without inflation. If the institutions were to make two or three submissions in respect of the White Paper, how would they deal with those aspects, apart from promoting and making it easier on the banking system itself? What about ways and means for ensuring the customer is protected to some degree, more than he or she is?
This meeting is about the European forum, yet we are not talking about that. I have to leave in five minutes. That is why I was anxious to bring matters back to the White Paper on the integration of the European mortgage credit markets, the purpose for which we are here. The European Commission states that the European countries will be given a final chance to open up and integrate mortgage markets on a voluntary basis. If member states such as Ireland were to choose not to follow the proposals in that statement, will the European Commission turn these recommendations into directives? I should like a viewpoint on that because it seems to me the Commission is referring to voluntary initiatives, yet a big stick must be threatened somewhere along the line.
Ms Eimer O’Rourke
There are a couple of different aspects to be addressed. From the perspective of the industry, when we have discussions with the Commission, we believe it sees consumer protection areas as potentially voluntary or mandatory. The industry does not have a strong view, I believe, as to whether it should be voluntary or mandatory so long as it is similar, because the objective is integration. If it was a voluntary agreement, it would have to be at EU level. Some of the issues referred to would lend themselves better to voluntary agreements, while others would not. An example is the definition on APR. It is difficult to see how we can get representatives of an industry to talk about formulating price. It strikes us as being something that should be done by a regulator, rather than an industry. The early repayment might also be difficult if one is trying to get an industry to co-operate. Effectively, it is something which could shape or distort a market.
What is the current state of the bridging market? Is bridging finance available?
Ms Eimer O’Rourke
I do not have any data on bridging. I do not collect data on bridging. In terms of the overall mortgage market, the indications are that lending is still continuing at a pace--
Are there no applications?
Deputy Treacy asked a question and he is entitled to an answer. It is a topical question and is in the realm of banking services. Somebody somewhere must have a policy on these matters, so it would be beneficial from the point of view of how the banking system works throughout Europe. Are we the beneficiaries of any Europe-wide criteria? Do we have some serious input and are there changes that we should make? These are simple questions and we should get the answer to them.
If Ms O'Rourke needs time to reflect, I can give her examples.
She can write to us.
Two clients came to me last week, both of whom were sanctioned for building society mortgages. There was a title problem in one case that had not been concluded, and a title problem in the other case where the title was left to a beneficiary of a will who then had to transfer it to another person, but neither transfer had gone through. These people proceeded with their developments based on the planning granted and the mortgage sanctioned. They had already started with the initial draw down of the mortgage. They came to me because they could not get bridging finance. I phoned two banks and I was told by representatives of one bank that they were not interested due to current policy. The representative of the other bank told me that the bank only does bridging finance for its own mortgages.
As a mortgage manager in the past, I know that one could go to any bank with a letter of undertaking from the solicitor to convey the title to the building society and the cheque to the bank later, and there would be no problem. One usually got a 12 month bridging period to get the work done. It simplified everything for everybody. There was money for the bank, satisfaction for the customer and a guarantee for the building society. That process seems to be frozen but if that state of affairs continues the economy will freeze as well.
Ms Eimer O’Rourke
I apologise, Chairman, but I did not understand the question at the time. We do not have data, but I will be happy to inquire about policy and revert to you and the Deputy.
I thank Ms O'Rourke.
Ms Mary O’Dea
I would like to pick up on some of the issues raised. We welcome the Commission's proposal to look at the costs and benefits of introducing this as a directive, which was the issue to which Senator Quinn referred. We would prefer if there was not too much emphasis on the costs and an emphasis on the benefits. We believe that consumers in Ireland are better placed than many of our European counterparts. Even if a mortgage lender is selling a mortgage into Ireland from overseas, the protections that we now have in our statutory consumer code on selling suitable products apply to consumers in this country. Even if it was there on a voluntary basis, the protections we still have here are very strong.
However, things like solicitors' undertakings would be more difficult. Aspects, such as those involving the Land Registry, would still need to be tackled on a cross European basis. There is much consumer protection but we need to look at these other areas. I do not believe that level of consumer protection applies across the board in Europe. We have also introduced the concept of competency requirements to ensure that those selling mortgages understand what they are selling and whether it is an appropriate product for the customer in question.
There was a good deal of discussion at the previous meeting regarding 100% mortgages. We have taken steps to ensure appropriate policies on management and lending are in place. In May 2006, when we became concerned at the growth in mortgage lending, we adopted measures to amend the risk rating of new Irish residential mortgages so that any mortgages which exceeded 80% of the value of the property would attract a higher capital charge. This means the institutions must set aside a higher amount of capital, thus dampening that type of lending. In addition, at the end of 2006, we took measures to increase capital requirements for certain categories of property related to lending with higher risk rates. These capital charges on speculative real estate and so on helped to dampen the market.
We are one of the few regulators internationally to have taken these types of capital measures using both the front-line consumer side and, in the background, the capital side. We have also revised our stress testing guidance so that, from 1 October 2007, institutions were asked to stress test all applications for residential mortgages at 2.75% above the European Central Bank minimum bid rate to ensure the customer could afford repayments after any interest rate increases. Affordability is the critical issue.
We strongly support the Commission's proposal to explore further means of ensuring responsible lending, drawing on the lessons we have learned in the United States. It is important to look at the global perspective in this regard. While mortgage credit markets are localised, the wholesale market which provides the funding for those markets is international. Since the crisis in the United States market unfolded, the ECB has been a key player in efforts to ensure stability through its liquidity provisions.
The banking system in Ireland is well placed for the current turmoil. Looking ahead, however, the operating environment for banks remains challenging. In particular, the market for term funding remains disrupted. In line with our European and United States peers, funding costs for Irish banks have increased significantly since the onset of the financial turmoil last summer. Several of the banks' funding channels have dried up, making them more reliant on short-term money markets and customer deposits. The cost of unsecured money market funding has increased substantially, with the three-month Euribor rate currently standing some 70 basis points above the European Central Bank's minimum bid rate.
In Ireland, banks have the benefit of accessing the European Cental Bank for liquidity support, a facility not available in all jurisdictions. The Central Bank and the Financial Regulator have been working together to monitor the domestic situation closely. We have had information-sharing discussions with the chief executive officers of the main financial institutions. We have increased the frequency of liquidity reporting from quarterly to weekly so that we have frequent follow-ups and detailed discussions with all the institutions. On the consumer side, in the case of customers who find themselves getting into arrears, we have particular protections within the code which oblige the institution in question to contact the customer individually to work through this. We have highlighted this as one of our themed inspections for this year. As part of this, we will examine not only those mortgage providers which have been regulated in the past but also those in the so-called sub-prime market, which have been lending money at higher rates of interest to higher risk customers. We will examine their arrears policy to ensure that instead of moving immediately to repossess properties, they first work out a programme with customers to assist them in making their repayments.
The entire model of banking has changed significantly. The days are gone when customers went cap in hand and had to be on first name terms with the bank manager. This is good for competition because it allows customers to move their business from one institution to another. One of our key messages to consumers is that they should transfer their custom if they are unsatisfied with the service they are receiving. My colleagues mentioned the switching code. We have worked hard to make it easy for customers to switch from one financial service provider to another. All the banks are marketing that switching information because they want to win customers from each other. We strongly urge that customers consider the benefits of switching at least some of their products. For example, it has never been easier to switch one's current account. If customers are dissatisfied with the level of service offered by the new institution, there is nothing to stop them switching back again. The institutions will want to reclaim any lost business.
One can switch one's overdraft.
I apologise because I must leave soon. The proposal of the integration is to enable people to take mortgages across the border and somewhere else. Is there really a need for that? What impressed me last week was a person who showed me the range of competition areas in Ireland. Does it seem that the European Union is going to great pains to initiate this when it seems to be very easy for a foreign bank to open a branch here? If this is the case, is there a need for all of this integration or are we just as well encouraging and allowing foreign banks to open up here?
The figure which I believe Ms O'Rourke gave us last week cropped up. She said that very few people go abroad for a mortgage and those that do usually do so for perhaps a home in a different country. Are we going to huge pains with this integration proposal when we could make it easier for foreign banks to open up here? Is there is a need to make it easier for these banks to open up here?
Ms Mary O’Dea
The model to which Senator Quinn referred is very much the demand-driven integration model.
Exactly.
Ms Mary O’Dea
Are people demanding these products? One could look at it another way and ask about supply-driven integration. For example, there may be mortgage providers in other countries who might find Ireland an attractive market and, therefore, offer additional products such as long-term fixed mortgages which we do not see as a feature of the Irish market. Alternatively, they may drive further competition within the market if they see this is an attractive place in which to do business. They will only see this country as an attractive place in which to do business if they think it will be easy in terms of matters like the Land Registry and solicitors' undertakings.
While I believe there is very good competition in the mortgage market between the domestic players, and we have see very aggressive competition in the mortgage market and have plenty of products on offer, further integration and competition is always good for consumers.
Ms O'Dea mentioned 100% mortgage lending. Some of us have had experience of well over 100%. An example would be not far from where I live. The price of a house increased from €300,000 to €380,000 and I can imagine it reducing to €310,00 or €350,000. I would not like it if I was a purchaser, but that has happened. That is not 100% lending.
Last week, Ms O'Dea referred to the ability of the person to pay. In other words, the person taking out the mortgage had an ability based on their income or whatever the case might be. That, however, had no bearing on the value of the property. If we move into a situation whereby negative equity appears on the scene, that will then be seen to be very indiscreet lending, to say the least, which could have a significant negative impact on the entire economy. What can Ms O'Dea suggest in the future that will have a more dramatic impact on that kind of thing not only governing the system here but as an input on the White Paper in respect of how we can be of benefit to our European colleagues in that area? I know the measures that IFSRA has undertaken.
Ms Mary O’Dea
Negative equity is a very stressful situation for people to find themselves in. It is stressful regardless of whether one has paid cash one has spent a long time saving or whether one was lent the money. Either way, one feels one has bought an asset which is not worth as much as it was when one bought it. It has a very negative impact on customers.
In terms of the Chairman's specific request for a suggestion to improve things, we believe it relates to extending the protection in the consumer protection code throughout Europe in respect of suitability because the key requirement is whether the loan I am extending to a person is suitable for that person, regardless of what it is for. One gathers information about the purpose, what the person is going to do and how they are going to take on whatever it happens to be.
Nobody predicted how the housing market would move the way it did. Those who predicted it many years ago predicted it for a long time and I am sure very wealthy people predicted it. The issue is that regardless of the asset a person is buying, if they are borrowing money for that, the institution has a duty of responsibility to engage with the customer and ensure that they are buying that asset in the full knowledge of what can happen and that, regardless of whether it is a big investment product or a house, things can happen within the market over which the consumer has no control. We believe that it is this engagement of suitability at the point of lending that is the critical issue.
Will Ms O'Dea make a short submission on what she views as the four or five major points that the committee should consider in its submission to the European Commission to ensure the widest possible access to the market for the customer and to protect the customer and the integrity of the financial system and the property market, thereby avoiding a situation in which five years of a recession that could have been avoided in the first place are necessary for recovery?
Ms Mary O’Dea
We would be happy to do so.
Could the Irish Banking Federation do likewise?
Ms Eimer O’Rourke
Yes.
The IBF has first-hand experience of these matters and a unique direct dealing with the public. The committee would be anxious to learn of its main suggestions as to how the issues can be addressed. It is not in the interests of the Irish or European economy or European consumers to visit fringe areas too regularly.
Today, I received a note to the effect that my mortgage interest rate has increased by another bit, which will make the situation more interesting. I presume that further increases will follow. Will the Department of Finance comment? It is influential in this regard, notwithstanding the fact that it is delighted when property values increase gradually. From its point of view, the greater the increase the better. However, there must be a degree of control. As a Minister for Finance once stated, there must also be management.
The director referred to the sub-prime market. How prevalent is it in Ireland, are many institutions involved and what percentage of the overall market does sub-prime lending represent? Why has it impacted on this island, where I had believed it to be at a minimum?
Ms Mary O’Dea
In Ireland, sub-prime lending has a different meaning than it does in the US. Here, it is someone who has a poor credit history being lent to at a higher rate of interest than those without a poor history. This is nothing like the issue in the US, where one could argue that some of those who received mortgages were inevitably going to default. The levels and scales are different.
With the permission of the Chairman, I will revert to Deputy Treacy with specifics on the market's size, but it is small. We have only recently assumed regulation of those who lend money but do not take deposits, which is effectively the area in which many sub-prime lenders operate. As lenders were not putting deposits into their books, they did not fall within the regulatory system.
Anecdotal evidence would suggest an incentive for lenders within institutions to get rid of the cash, thereby leading to many problems. I do not know whether this is fact or fiction, but it is the word on the street.
Ms Mary O’Dea
I have no evidence one way or another. Some 25 firms have applied for authorisation as retail credit firms and home reversion firms, a small number of which operate within the so-called sub-prime sector. As we now have regulatory responsibility for such firms, we have placed arrears and repossessions at the top of our priority list.
Is the Financial Regulator monitoring them and the market closely?
Ms Mary O’Dea
Yes. We are monitoring all aspects of them from the point of sale to the point of solvency to the point of liquidity. Given the current market turmoil, regulators do not sleep well and we are on high alert, which is our job. We are confident that the banking system is well placed and sound.
Mr. Paul O’Connor
Deputy Treacy asked why this island is being affected if we have not had such a large sub-prime issue. We have not had any such issue. The number of banks that invested in sub-prime is minimal. The Central Bank said this is at negligible levels. The issue is the cost of funding. What happened in the global markets has pushed up the cost of funding as Ms Mary O'Dea outlined. As with every bank across Europe, the cost has been driven up substantially, by 1%-2% above what it was last August. The knock-on impact of this affects banks' lending policies as do the regulatory measures. Banks have not been given an incentive to lend the higher order element of a loan by the new regulatory measures on capital which came into effect on 1 January 2008 and the increased cost of funding.
When deposits are low surely that should offset it. Deposit rates are not high.
Mr. Paul O’Connor
They have crept up because there is competition for those deposits and banks are paying higher rates to attract them.
I note the reason for freedom, fluency and liquidity. If two multimillionaires get involved in the purchase of a property and use their own money, they can pay what they like for it and it has no effect on the banking system. However, if either or both resort to lending institutions to draw heavily when making such purchases it can have a far-reaching and dramatic effect on the integrity of the banking system in a short time. There are those who say that it happened in the past but cannot happen nowadays. It can happen nowadays more dramatically. Lending institutions must be aware of their responsibilities in that situation. The ability of the borrower to pay is enhanced further by the ability of the borrower to borrow. That has a negative knock-on effect on the economy by inflating the economy unnecessarily and creating problems further down the road, such as those we are now experiencing.
We must ensure that these things do not happen across Europe. Unfortunately, they seem to recur every cycle, after 20 years, when people have forgotten what happened in the past. I hope everyone is aware of the necessity to make provisions to ensure this does not happen.
I know Mr. Bradshaw is dying to get in to tell us the Department's wisdom in this area.
Mr. Bob Bradshaw
I am not sure that the Department has wisdom in anything but I will try my best. The Chairman is correct in saying that people have under estimated risk in many areas. This gave rise to the problem in the sub-prime market in the US, which spread worldwide and the consequences of which we will have for some time. The Chairman is correct to state that it is appropriate that banks have proper systems for assessing risk. It is true that the Irish banks have good, strong systems for that and recent events have encouraged them to strengthen and deepen these controls, and also at European level. The Irish banking system, in my experience is rather better than it is in Deputy Treacy's experience. Having lived in Brussels and used the banking system there for several years, I was glad to come back to the Irish system. It has a human touch that I did not find in the more mechanised system. There was a touch of rationality that I appreciated when I came home but not everything in the system is perfect.
We have no reason to fear that our banks and mortgage providers are at any form of risk from the widening of the European market in the terms of this White Paper. There are many positive things that our service providers could offer if they wished to provide services to countries overseas. We want to protect the Irish consumer. There are certain strengths of our system we think are important to maintain, in particular the arrangements on the early repayment of loans where the Irish consumer is protected by the Consumer Credit Act 1995 which gives them an incentive. We do not want to throw this out with the bath water in any new arrangement.
We have extremely low rates of foreclosure in the Irish market. This has its roots in the long-standing land war and rights issues which go far back into Irish history. It is also an appropriate response by the Irish banking system to the peculiarities of the Irish banking market. A non-national provider might not have the degree of subtlety in dealing with it. There is little to fear in the White Paper but we wish to ensure that it provides Irish consumers with the same level of protection as they have now.
There is a good degree of openness in the Irish market so I doubt too many Irish people will go to Athens to arrange their mortgages. There are many linguistic and other difficulties in the way. Even thinking about it I am rather reluctant to go back to Belgium to organise a loan with my previous bank which is still there under another name and even larger than it was when I left. The customer protection aspect is important and we want to stress it.
The Chairman mentioned the property market. We know that for many years the Irish property market was seen by commentators as being overheated. People did not fully follow this, denied it and did not accept it. Unfortunately, the consequences are not ideal for everybody in the industry. We can only hope it is a relatively short phenomenon and that the strong growth that was there in the past will return quickly.
We are willing to help the European Commission in studies. It is particularly taken with the work the Financial Regulator is doing in financial education in which the Irish market is extremely well-served. We have a big mountain to climb in this area because the level of knowledge of financial service products tends to be relatively low. It is difficult to gain it but if somebody wants to, there are documents and brochures on the Financial Regulator's website which will help them to do so.
This White Paper is useful. We hope it provides a better opportunity for Irish consumers to go to an overseas provider, for an overseas provider to come to Ireland or for overseas providers to import advantageous features of their mortgage markets to Ireland. We do not want them to bring a rounding down rather than a rounding up to the marketplace.
From a consumer, personal and legislative point of view I am reassured by what Mr. Bradshaw has said about the European proposal. The ability to pay is an important criteria but it should not be the criteria on which any application is based. I will give a simple example. The ability to pay has inflated the house market which has led to all of our problems.
Without a doubt.
A few years ago a couple came to me and said they wanted to relocate to the west under the decentralisation programme and asked where they could get a house. I found a house for them and told them that if they went to "X" and said I sent them that they would be looked after. They agreed a price within five or ten minutes. The vendors were happy and said they would speak with their agent who told them not to sell, that the house would sell for 50% more to an investor client buying his tenth house for 100% cash. The person employed 200 people and had a great deal of cash. He was able to get a tax write-off. Ability to pay had distorted the market. If the mortgage was based on a maximum of 90% an ordinary couple had some hope of buying a house. Ability to pay devoured them. The house made 50% more, which was immoral.
That is the point I made in regard to heavy hitters, for want of a better description, who decide to get involved in the market and draw on money by virtue of their size. They have the capacity to do major damage to the banking system, financial services and property values. I am in complete agreement with Deputy Treacy because I have seen countless examples of the issues he described. As far as I can see, no rationale was applied to the value of properties in varying circumstances, such as higher interest rates. These criteria have to be brought back to the market.
When I got my mortgage, the strict rule of thumb was that I could borrow no more than 2.5 times my income.
A deposit was also required over a minimum period of 12 months.
I did not have a problem with that. However, a formula was introduced that had no bearing on a person's income. It was based on potential income if everything went well and if interest rates remained low. Members will be aware that economies grow when interest rates are low but that potential is eroded by failure to enforce best practice in financial services. This creates problems not only for the economy but for the banking system.
Perhaps the Department of Finance can share with us its opinion of the issues addressed in the White Paper? The White Paper is of no benefit to anybody unless it helps to address the issues that affect European financial and property systems and predict the problems that might arise. I spoke about the number of scams that have occurred in recent times. If it is possible to perpetrate these within the banking system, something has gone wrong. I agree with Ms O'Rourke that it should be much easier to track scams with modern technology but why, for example, was the most recent scandal in the French banking system not detected earlier? The only conclusion we can come to is that the tracking system worked in that case but no action was taken.
Members have raised a variety of issues that need to be addressed before the general public can be reassured and the market stabilised. We must also ensure that we will not be led off on a tangent by somebody with an agenda. I ask the representatives to make submissions on these issues before we make our report. Depending on what happens between now and November, we may invite them to another tête à tête. I thank them for meeting us and hope the thrust of our discussions will bring a positive result in the future.