Dáil Éireann Debate, Tuesday - 2 October 2012
127. Deputy Simon Harris asked the Minister for Finance the degree to which the European Central Bank interest rate reductions have been applied to business loans across the banks in which the State holds a significant shareholding; and if he will make a statement on the matter. [41543/12]
View answerAs the Deputy will be aware, the Banks’ policies in relation to lending rates are a matter for the boards and management of each institution. Notwithstanding the fact that the State is a significant shareholder in various institutions, I must ensure that the banks are run on a commercial, cost-effective and independent basis to ensure the value of each bank as an asset to the State, as set out in the Memorandum on Economic and Financial Policies agreed with the EU Commission, the ECB and the IMF. Relationship Frameworks have been specified that define the nature of the relationship between the Minister for Finance and the banks. These Frameworks were published on 30 March 2012 and can be found at; http://banking.finance.gov.ie/presentations-and-latest-documents/. The pricing of financial products, including business loans, is a commercial decision for the management team and board of each bank, having due regard to their customers and the impact on profitability, particularly where the cost of funding to each bank, including deposit pricing, is under pressure. Neither the Central Bank nor the Department of Finance has a statutory function in relation to interest rate decisions made by individual lending institutions at any particular time.
However, notwithstanding that, I have received the following input from the covered banks in response to your question:
PTSB:
I am informed by PTSB that it does not have a significant amount of business loans and therefore this question has little relevance to that institution.
AIB:
AIB doesn’t wholly fund itself via the ECB and so reductions in ECB rates don't necessarily lead to a reduction in funding costs for the bank. As part of the restructuring of the bank AIB is required to reduce its levels of ECB funding in exchange for retail / business deposits and historical wholesale market funding. In the case of business loans, most business loans in AIB reference EURIBOR or a form of EURIBOR (e.g. AIB's Business Loan Rate (BLR) is an average of 3 month's historic 3 month EURIBOR fixings). A liquidity premium and margin to cover cost of risk, operational costs and funding costs, is then added to this reference rate to arrive at a total interest rate for the customer. AIB keeps these rates under constant review.
IBRC:
The majority of IBRC’s commercial loan book references money market interbank offer rates – for Euro based loans, rates are set at a margin above EURIBOR and for sterling based loans interest rates are set as a margin above LIBOR. Changes in money market Interbank offer rates (i.e. LIBOR or EURIBOR) are applied to individual loan accounts in accordance with the contractual interest reset dates agreed with the borrower. Typically interest rates on IBRC commercial loans are scheduled to reset every month or every three months.
BOI:
Business lending by Bank of Ireland (BoI) is not linked to ECB rates and therefore BoI has not passed on recent ECB rate reductions on its standard variable rate small business loans. BoI sets interest rates on standard variable rate business loans with reference to BoI’s cost of funding.
Prior to 2008, the Bank’s cost of funding was directly linked to official interest rates (e.g. Euribor). When official interest rates moved, it was appropriate to pass on the benefit or cost of that movement to borrowers through the banks standard variable rate. Since 2008, BoI’s cost of funding has become disconnected from official market interest rates due to:
– the intense competition for customer deposits: as a result deposit rates have not reduced in line with reductions in official interest rates, and;
– the increased cost of issuing stable term wholesale funding, reflecting distressed market conditions, the reduced credit rating of BoI and the Sovereign and heightened concerns regarding the overall euro area.
The result of this disconnection is that the Bank’s cost of funding is no longer directly linked to official interest rates.
