I am speaking on behalf of the Minister for Finance, who unfortunately cannot be here. On his behalf, I thank Deputy Pearse Doherty for proposing this Bill on an important issue. The Minister for Finance appreciates the concerns the Deputy has attempted to address in this Bill. The Government considers this to be a very serious issue, which is why the Minister asked the Central Bank to examine this issue and met the six main mortgage banks to discuss the banks' plans to reduce mortgage payments. The Minister has made it clear that the issue of a penal banking levy in the budget or powers for the Central Bank to regulate interest rates will be considered at a later stage if sufficient progress is not made.
This Bill requires the Central Bank to consider whether it is necessary to review the interest rates charged on mortgages and gives it the power to issue a direction to a covered institution to vary its mortgage interest rate. It also gives the Central Bank power to set a maximum interest rate ceiling. The Bill puts forward some of the considerations that the Central Bank must take into account in this review.
The Government is opposing this Bill, and I will outline the reasons it cannot be accepted.
There may also be legal issues regarding definitions in the Bill, but I do not propose spending significant time on them, since the Bill is being opposed. The specific reference to interest rates that reflect market conditions could result in the exclusion of mortgages that use different wording to describe how and when rates change.
The Bill appears to propose two separate but overlapping powers for the Central Bank: to direct a variation in the level of interest under section 2(1) and to set a maximum rate of interest that may be charged under section 3(1). It is not clear why these are presented as separate powers or whether they are designed to apply in different circumstances.
It is worth drawing specific attention to the possibility that there could be issues of encroachment on the independence of the Central Bank. This would have to be considered, particularly in a European context. A major flaw in the Bill is that it restricts the power that it would give to the Central Bank to covered institutions only. Therefore, a significant number of borrowers' situations would not be addressed. It is a tenet of public policy that all borrowers should be treated equitably.
Deputy Pearse Doherty has attempted to avoid making a negative impact on competition in the mortgage sector by only allowing the Central Bank to issue directions in respect of the covered institutions that have benefitted from State support. However, by focusing solely on covered banks and standard variable rates, SVRs, it is not clear that the Bill would achieve the objective of reducing payments and it would not benefit customers in other banks or those on other products. New entrants or existing suppliers who are not covered would not be impacted.
There is no question but that the Minister shares the Deputy's concerns about the high SVR currently being charged by mortgage lenders. As the Deputy will be aware, the Minister met the senior management of Ireland's six main mortgage providers in May and strongly delivered the message that changes were expected. The meetings focused on the mortgage market and the comparatively high SVRs being charged. The banks agreed to review their rates and products and, by the beginning of July, which is in only a few weeks' time, to have simple options to reduce monthly mortgage payments for mortgage customers.
There is no one-size-fits-all offer and, in a competitive market, different banks will offer different products. Some of the potential products discussed include lower SVRs for existing and new customers, competitive fixed rate products and lower variable rates that take account of loan to value, LTV, ratios for new and existing customers. The need for greater competition in the market and how easy it is for customers to take up new products and switch between different institutions if they wish to avail of better rates were also discussed. Assurances were sought and received that home owners in negative equity would be able to avail of options to reduce their monthly payments.
Progress will be reviewed during the coming weeks and a follow-up set of meetings with each of the six banks will take place in September in advance of the budget. The issue of a penal bank levy in the budget or powers for the Central Bank to regulate interest rates will be considered at that time if sufficient progress has not been made. Bank of Ireland has announced cuts of up to 0.3% in its fixed mortgage interest rates available to new and existing customers. AIB has announced cuts of 0.25% for AIB SVR customers and 0.38% for EBS and Haven SVR customers. AIB also announced reductions in LTV and fixed-rate mortgages across AIB, EBS and Haven. These rate reductions will apply to new and existing customers.
It would not be appropriate to accept this legislation in advance of the date agreed with the banks by which they must have simple options in place to reduce the monthly mortgage payments of the hard-pressed households on SVRs. Senator Quinn initiated a Bill last month in this regard and Deputy Michael McGrath initiated a further Bill this week.
The Government is committed to helping to address the particular problems faced by those individuals who bought homes at the height of the property boom between 2004 and 2008. In this regard, in budget 2012 the Minister fulfilled the commitment in the programme for Government to increase the rate of mortgage interest relief to 30% for first-time buyers who took out their first mortgages in that period. This was the period during which house prices peaked. The 30% rate will continue to be applicable to those first-time buyers for the remaining years that mortgage interest relief continues to be available. In the absence of this change, the available mortgage interest relief would have gradually reduced to a rate of 15%.
The Government is firm in its belief that competition is the best way to achieve a sustainable long-term solution. The ESRI research note published today supports this view. It reads: "Overall, these results suggest that the most effective way for the continuing wedge between the different mortgage variable interest rates to be remedied is for a more efficient resolution of the mortgage arrears issue and greater competition within the domestic banking sector."
What has the Government done to foster competition? It introduced changes to section 149 of the Consumer Credit Act 1995 via the Central Bank (Supervision and Enforcement Act) 2013. This section regulates fees and charges and the changes mean that it does not apply for the first three years of operation of new entrants to the Irish banking sector. There is some evidence of improvements in the banking sector, with a number of institutions introducing new products and adapting their business models. In the past 12 months, there have been a number of new entrants to the mortgage market, bringing additional and welcome competition to the sector. Some new branches and hubs are opening in certain parts of the country, reflecting progress.
Competition is essential and banks will only respond in terms of pricing if they believe that they will lose customers otherwise. Professor Honohan, who has been much quoted tonight, stated that there might be 15,000 people who, if they had the time to do the sums, would save four-figure sums in one year by switching to a lower priced mortgage provider.
The ongoing mortgage arrears situation has had an impact on the SVRs charged by the banks. The Government is committed to helping people in arrears to reach sustainable solutions, and engagement between lenders and mortgage holders resulted in almost 115,000 solutions being found by the end of December. On 13 May, the Government announced a number of further measures to support mortgage holders who were in arrears. Building on actions previously taken, these measures aim to increase the supports available to people in arrears and the number of people availing of them. This package will reform the personal insolvency framework to give courts the power to review and, where appropriate, approve insolvency deals that have been rejected by creditors. The mortgage-to-rent scheme will also be expanded and made more accessible. It was also agreed that the Money Advice & Budgeting Service, MABS, would play a greater role in offering information, advice and assistance to borrowers in arrears.
In advance of the meetings that the Minister held with the main mortgage providers, the Central Bank, at his request, prepared a report on the influences on SVR pricing in Ireland. This report was submitted to the Department of Finance last month and has been published on its and the Central Bank's websites. The report provides a valuable insight into the mortgage market and I urge Deputies to read it carefully. It showed that 52%, or €60 billion, of credit advanced to Irish resident householders for home purchases was on a tracker rate, with a further 7%, or €8 billion, fixed and the remaining 41%, or €47 billion, on SVRs.
The report acknowledges that the spread between official ECB rates and the standard variable rate is relatively high, and lending rates are above average compared to European peers. However, it made clear that the high pricing of loans reflected three factors: credit risk, competition and bank profitability. The report went on to say that credit risk is influenced by the high level of non-performing loans and the lengthy and uncertain process of collateral recovery. Competition is weak. This is not unrelated to the credit risk, as new entrants may be deterred from entering the Irish market. Finally, bank profitability is constrained by legacy issues, but profitability is needed to build capital buffers and meet increasing regulatory requirements.
The report did note that the reduction in ECB policy rates has not been passed through fully to the funding costs of Irish banks. In addition, non-tracker mortgage lending rates have been slower to respond to a lowering of the policy rate than to increases. Furthermore, the Central Bank thought it was likely that the rates in effect for most banks at the end of April 2015 were higher than would be necessary in the long run for a bank unburdened by a poorly performing mortgage back book. The Central Bank has highlighted that the mortgage business as a whole is not profitable for Irish banks. This reflects the high level of non-performing loans and tracker mortgages on their books. The Central Bank suggested that the ability of the banks to partially compensate for the burden of trackers by retaining higher spreads on variable rates is likely to be transitory, as such spreads will in time encourage entry into the market. This report by the Central Bank sharply cautioned that any policy steps to interfere with the rates being charged risk creating damaging side-effects. Further research from the Central Bank can be expected over the coming months.
Another reason for opposing this Bill is that action such as that suggested in this Bill would be premature at this stage, given that there have already been moves in this area by AIB and Bank of Ireland to reduce rates. I have no intention of cheerleading for these. Obviously, we are waiting for moves from the other banks, but we have seen some progress already. There is no reason not to expect further developments in the near future. As I have said, the Minister is opposing this Bill because it is not the right time to act. He has set down clear deadlines with the banks. We are currently in the interim period, when such action is due to take place and has already taken place in the case of a number of providers. Furthermore, the Minister is opposing this Bill because he is taking account of the views of the Central Bank on whether it wants the power to regulate interest rates.
In relation to the regulation of the standard variable rate, in his introductory statement to the Joint Committee on Finance, Public Expenditure and Reform on 28 May last, the Governor of the Central Bank, Professor Patrick Honohan, re-emphasised his opposition to administrative control of interest rates. While he acknowledged that he would welcome a reduction in banks' SVR rates in current circumstances as a benefit to the economy at large, he said it remained his firm belief that the introduction of administrative controls on interest rates in Ireland would be bad for the country as a whole in the medium term, notably because of its "stultifying effect on bank efficiency and ... chilling effect on the entry of other banks". The Governor acknowledged that "since the crisis, banks' standard variable rates have moved higher than previously, relative to their cost of funds". He continued:
It is essential for the survival of banks that they achieve a sufficient return on the investment of funds, including equity, much of which, in our case, is owned by the Government. If not, they will not be able to achieve and maintain the growing requirement for capital adequacy in the years ahead. The profitability goal has to take account of long-term considerations, including the risks involved in lending, especially the actual and prospective losses on non-performing mortgage loans.
While the Governor signalled that he would "welcome a reduction in bank standard variable rates in current circumstances as a benefit to the economy at large," he said was opposed to this being brought about by "administrative control" and instead thought that competition would be the crucial determinant. The Minister has also highlighted the importance of competition in exerting downward pressure on interest rates, although it is acknowledged that this competition must be tempered by prudence. The Governor pointed out that in the current conditions, "the standard variable rate borrower’s main protection is competition: the fact that, by setting its standard variable rate too high, any bank stands to lose business, whether new business or switchers, to competitors". He acknowledged that the effectiveness of this strategy was currently hampered by the low level of competition in the Irish banking sector, while suggesting that this fact further strengthens arguments against administrative control of interest rates. He made it clear that ensuring "official policy does not inadvertently deter competition and entry of banks to the market is thus vital for the long-term health not only of banks, but of the economy". He warned that if Ireland were to be the country that controls interest rates, this would have a signalling value far in excess of what one might think in terms of causing a retreat of service providers.
The Governor firmly cautioned "against the enacting of legislation that would provide for officially administered lending rates". I have yet to see convincing evidence to justify going against this advice. He explicitly stated:
Nothing could be more likely to curtail and discourage entry of new competitors into Irish banking, and without the possibility of such entry, I cannot see that banking can recover the operational efficiency and competitive pricing that is essential for Ireland in the long run. For the sake of modestly lower SVRs for a few quarters, a much larger and quasi-permanent, albeit somewhat invisible loss, would be incurred by the customers of the banking system in Ireland. Well-capitalised banks operating more competitively will, in the end, offer lower rates and better service. [In addition] close administrative control of interest rates would not be easily compatible with the principle of an open market economy with free competition, which has underpinned the considerable increase in national prosperity over the past half century in Ireland, and which, of course, is enshrined in the European Union treaty. [The issue of administrative control] is not a matter to be taken lightly or [quickly] for what would clearly be at best a transitory advantage.
As Deputies are aware, banks must operate on a profitable basis if they are to provide the services necessary to the economy. Furthermore, this is necessary for banks to comply with international regulations surrounding capital requirements, to be fully financially autonomous and not dependent on the State, to have the resilience to deal with future shocks and to serve customers adequately.
The Minister has made it clear to the banks that the possible introduction of a penal banking levy in the budget or the possibility of giving the Central Bank the power to regulate interest rates will be considered at a later stage if sufficient progress is not made. The Central Bank does not want the power to regulate interest rates. In fact, it believes this power would be detrimental to the economy and the country at large. I think we should take the advice of Professor Honohan, who has served this country well. The Central Bank set out its position in relation to policy measures to administratively determine interest rates in a report it submitted to the Department of Finance on 11 May last. As I said earlier, this report, which has been published on the websites of both organisations, maintains that policy measures to administratively determine interest rates would be likely to have damaging side-effects. By discouraging entry, innovation and competition, such measures could result in higher lending margins and higher Exchequer costs over the longer term.
As recently as 28 May last, when he addressed the Joint Committee on Finance, Public Expenditure and Reform, the Governor of the Central Bank expressed his firm conviction that the introduction of administrative control on interest rates in Ireland would be bad for the country as a whole in the medium term. Furthermore, the Minister for Finance met the main mortgage providers in May. A clear schedule has been outlined to the banks. It has been made clear that the banks have agreed that by July there will be moves to ensure all customers have offers of lower payments either through lower SVRs or by fixing their mortgages for a particular term. The banks must respond to this initiative, as the Minister will meet them again in September. For that reason, it would not be appropriate to accept this Bill until the effects of current policy initiatives have been evaluated. In addition, all advice from the Central Bank indicates that the powers contained in the Bill would prove detrimental to Irish mortgage customers and the country as a whole in the long term.