Seanad Éireann díospóireacht -
Thursday, 12 Jun 2003

Vol. 173 No. 9

Interest Rates Reduction: Statements.

Minister of State at the Department of Enterprise, Trade and Employment (Mr. M. Ahern)

On behalf of the Minister for Finance, Deputy McCreevy, I wish to speak about the changes in interest rates in the last week. The Minister and the Minister of State, Deputy Parlon, are abroad on business.

The level of inter-bank interest rates is a matter for the European Central Bank, which is entirely independent of any Government in relation to its monetary policy activities, and the individual financial institutions operating in the market. It is important for me to stress that neither the Government nor any Minister has a function in respect of the setting of interest rates, either on mortgages or more generally. This is a function of the competitive forces within the market.

However, I welcome this opportunity to discuss in the Seanad the economic and financial implications of the recent reduction in ECB interest rates. The recent 50 basis points cut in these rates – which is ECB terminology for a 0.5% cut – will have a positive effect on economic trends in Ireland. First, to the extent that the cut is passed on to borrowers, it will directly stimulate the Irish economy by increasing disposable income and domestic demand. In addition, it will boost activity in the economies of many of our trading partners, thereby stimulating demand for Irish exports. Our position as a small open economy, which is highly integrated into the euro area economy, means that an increase in European demand should have positive knock-on effects here.

The key factor in determining the extent to which rate cuts are passed on to borrowers is the level of market competition. In that regard, Senators will be aware that the Competition Authority is engaged in a study of the banking market. I understand that its study will deal with competition in the provision of banking services generally in the State. The study covers the markets in which the clearing banks operate, including other participants in those markets such as the credit unions and An Post. The study will seek to identify both the degree of rivalry between existing participants and whether there are any barriers to the entry of new participants.

The authority has undertaken to advise the Government if existing legislation or administrative practice has a disproportionate effect on competition and it will make recommendations for change if this is found to be the case. It also intends to identify issues relating to consumer inertia and plans to make recommendations to ensure that consumers can exercise their full rights to their advantage using the competitive process. It will, of course, consider appropriate action if any practice or arrangement appears to be in breach of the Competition Act 2002. The study is still in progress and it is planned to be completed this year.

Senators will also be aware of the recent establishment, after passage through this House of the relevant legislation – the Central Bank and Financial Services Authority of Ireland Act – of the Irish Financial Services Regulatory Authority. This authority carries a more advanced remit than any previous body in respect of its focus on the needs and requirements of consumers. The legislation has, for the first time, placed the statutory position of Consumer Director at the heart of the Irish financial regulatory system.

Neither the IFSRA nor the Consumer Director have a role in respect of price fixing for interest rate products. However, the Consumer Director has a number of crucial functions in regard to furthering the interests of consumers. These include: monitoring the provision of financial services to consumers; monitoring the extent to which competition exists among providers of financial services, in so far as it affects consumers of those services; increasing public awareness of the availability, costs, risks and benefits of financial services; issuing and enforcing codes of conduct, regulations, directions, etc., to financial services providers with regard to the conditions under which they provide services to customers; control and monitoring of customer charges, other than interest rates imposed by credit institutions and bureaux de change; and promoting, in general, the best interests of users of financial services.

In her annual report, the Consumer Director must specify, inter alia, how far she has promoted the interests of consumers of relevant financial services during the financial year concerned and “the extent to which competition exists among providers of those services in so far as it affects consumers of those services”. In summary, the role of the Consumer Director in regard to this issue is to monitor competition and to promote the interest of consumers.

The cut in interest rates by the ECB clearly provided a competitive opportunity for financial institutions here and a consequential cut in retail rates would have been expected. I am aware that the IFSRA made public its views on this matter.

Those taking out variable rate mortgages or other borrowings expect rates to fall as well as rise and, generally, the level of change in rates is a matter for the institution concerned. However, the Consumer Director has a role in monitoring the extent to which competition exists in financial markets and would, therefore, be concerned if the institutions were overly one-sided in the operation of their discretion in this regard. I understand that on this occasion the Consumer Director has advised consumers to ask their lenders about their policies in respect of the pass-through of interest rate changes. I am informed that the financial regulator intends to carry out a survey of interest rate pass-through on various lending and borrowing rates and to pass any relevant information in this regard to the Competition Authority in the context of its study of the banking industry.

Further consumer protection legislation, which will, among other things, establish industry and consumer advisory panels to advise the IFSRA and establish a statutory financial services ombudsman scheme, is currently being drafted. These will be substantial steps in ensuring the appropriate protection of Irish consumers.

There are, from time to time, things which Government can do to improve the general access to funds of credit institutions and other entities, with a view to assisting the efficient operation of the market, and the availability of choices for consumers. A recent example was the development and passage of legislation allowing for the issue under Irish law of asset covered securities. This legislation has not yet been availed of by Irish domestic mortgage lenders, but one international bank has pioneered the first issues of such securities and proved the concept as a viable one, which is available to credit institutions, among other funding options.

I thank the House for the opportunity to discuss these issues here today.

Acting Chairman (Dr. Henry)

Before we continue, I wish to make clear that it was agreed that this business would conclude at 1 p.m. Senator Higgins has ten minutes.

Mr. Higgins

With the permission of the House, I wish to share time with Senator Coghlan.

Acting Chairman

Is that agreed? Agreed.

Mr. Higgins

The decision by the European Central Bank to cut interest rates by 0.5% was a welcome relief for those with high mortgages. A four-bedroom house in any large town now averages a purchase price of €200,000. Despite the fact that European interest rates are at an historic low, this still represents monthly repayments of approximately €1,600 or €1,700 to a young couple on two average incomes. The sum of €400 per week is a huge burden just to, literally, keep the roof over one's head. When one then factors into the equation that we have jumped to the top of the European league in terms of prices and living costs, young people are put to the pin of their collars in order to keep body and soul together.

While the announcement ten days ago that housing prices are about to peak is good news for those who intend to invest in a house in the future, it is less positive for home owners and, in particular, from the point of view of those who have already made that investment, with mortgages of €200,000. It is potentially frightening news because it heralds a drop in house prices which would, in effect, mean a negative equity situation for some home owners.

We welcome the decision by the European Central Bank. When its Governor, Wim Duisenberg, announced that the ECB was reducing its interest rate by a half of 1%, many young couples breathed a sigh of relief in the expectation that the saving on their €200,000 mortgage would be €83 per month – not a princely sum, but nevertheless welcome. However, it was not to be. Not a squeak was heard for hours after the announcement from a single financial or lending institution as to whether or to what extent, if any, they would reduce their interest rates in the wake of the ECB cut. There was no indication as to what relief would be given to domestic borrowers.

The first cut in interest rates came from IIB Home Loans. Not alone was it the first, but it also passed on the full ECB reduction to its consumers. It took another two days before there was a budge from any of the other lending institutions. On Monday, the country's biggest mortgage lender, Permanent TSB, followed suit by passing on to its customers the full value of the ECB reduction. It was joined by NIB and ACC Bank. However, the two biggest players in the banking market, AIB and Bank of Ireland, held their cards close to their chests by demonstrating a characteristic tardiness in disclosing their intentions. Despite the fact that AIB is by far the country's biggest lending bank, and despite the headlines set by those who had made earlier announcements, AIB failed to pass on the 0.5% cut, resorting instead to a reduced cut of 0.38%. This was also the reduction conceded by the EBS.

Yesterday, on the Order of Business, Senators rightly alleged that the so-called rivalry between mortgage lenders is, in fact, a mock competitiveness and that a cartel is operating in the sector. This is an understandable perception. While we welcome the Minister of State's announcement concerning the Director of Consumer Affairs setting down certain parameters within which the banks will have to operate—

Ms O'Rourke

Yes.

Mr. Higgins

—a key component missing from that list is some kind of regulation of interest rates. One of my big regrets is that we did not insert a stipulation regarding controls on interest rates on Committee and Report Stages of the Financial Services Regulatory Authority Bill. Financial institutions have no obligations, moral or otherwise, other than to their directors and shareholders. It is profit at all costs and on this occasion their avarice has been manifestly exemplified.

Mr. Coghlan

I welcome the Minister of State back to the House, although he is being overworked at the moment, and I welcome what he has had to say. During the last week, we witnessed an amazing spectacle. On the one hand, the Taoiseach spoke about a moral imperative and obligation, while the banks were saying – as is the position outlined by the Minister of State – that they have a commercial imperative. We are all aware what their bottom line is. I find myself in agreement with the comments of my colleague, Senator Higgins. Perhaps when the Financial Services Regulatory Authority was being established we could have done more to define the relationship that should properly exist between the various authorities.

I welcome the enhanced role of the Director of Consumer Affairs as outlined by the Minister of State. Many such matters are being examined both by the director and the Competition Authority, to whose forthcoming report on banking I look forward, as I am sure other Members do also. It will give us further food for thought.

Of course it is right that mortgage holders should be protected to the maximum possible degree. Ireland has a good rate of home ownership, which is higher than many countries, including our immediate European neighbours. Home ownership is an important safety valve which gives people civic pride. There is a huge difference, however, between what is being charged to borrowers, including businesses, and this is affecting our competitiveness. We are being lectured repeatedly about competitiveness and we are doing much of the lecturing ourselves.

I do not necessarily agree with creating extra Oireachtas committees but the one that has been announced regarding corporate affairs and competition is very important. We already have 15 committees and I will not get into the argument about whether such work should be done by a new committee. It is wrong, however, that there is a such a wide disparity between what is being charged to mortgage holders and what is being charged for necessary commercial loans. That matter will have to be addressed.

I have one slight quibble with my colleague, Senator Higgins, who mentioned one of our leading financial institutions, AIB. I was upset that they did not pass on the full amount as sanctioned by the ECB, but they claim to be more competitive with a rate that is 0.2% less than their competitors in the marketplace.

As Senator O'Toole said yesterday, the House is concerned that there should be no conspiracy or collusion by a banking cartel. We must recall that the ECB president, Wim Duisenberg, said there is more room for manoeuvre. The ECB will address the matter again as early as 1 July to see how further interest rate reductions can be made. This is all very welcome because we need to stimulate the domestic economy as well as avoiding any tail-off or possibility of economic stagnation. We are aware that we have suffered and our competitiveness is crucially important, so I would like to see it being addressed. There should not be the current differential that exists between necessary commercial borrowing rates, particularly for the vast range of small businesses throughout the land that are so important for the economy. I would make a plea to the Minister of State in that regard.

I do not know what the function or role of the Financial Services Regulatory Authority or the Director of Consumer Affairs should be in this regard, but the question must be addressed at Government level because that disparity should not be allowed to continue.

Ms O'Rourke

I am glad the Minister of State, Deputy Michael Ahern, was able to address the House on this matter and to listen to the debate. I particularly appreciate that because he attended the House for the Final Stages of the Bill. I appreciate also the role of the House in highlighting this matter. It was taken up here on Tuesday, before there was any move by the financial institutions but just after the Taoiseach, the Tánaiste and the financial regulator had spoken out strongly about the need for the banks to pass on the ECB's interest rate cut.

I deplore the subservient way in which we, as consumers, are meant to behave towards banks and financial institutions generally. It has historical echoes of the cap-in-hand approach to the great master, seeking whatever he can give us. We all have bank accounts, cheque books and credit cards which are required for everyday business and commerce. The banks provide a service but we, in turn, are paying for it – it is not something that is being handed out free. It is not a case of touching the forelock and saying, "Thank you very much, Sir, I will not be back bothering you again". The banks have consumers' money, whether in large or small amounts, and therefore we have already gone three-quarters of the way in this barter arrangement. The banks hold our money in safe keeping but we are entitled to our full rights as consumers. That is what irks me.

I read some remarks made by Mr. David Holden who is responsible for public affairs at the Bank of Ireland. He said it was not within the bank's competency to pass on this reduction in interest rates. I cannot quite understand what he meant because, generally speaking, "competent" means that one is able to do the job in a reasonable manner. The day after the ECB interest rate cut, Mr. Holden said it was not within the bank's competency to pass it on. I remember reading his remarks and being entirely puzzled because I know Mr. Holden. He is quite well able to talk and disport himself but I wondered what he was at and what exactly he meant. I knew the story was only just beginning.

When I worked as a Minister responsible for consumer affairs I had begun to speak out about these matters. I was interviewed on "Morning Ireland" and recall receiving an irate telephone call from the head of the Irish Bankers Federation who said, "It had nothing to do with you, my dear," or words to that effect, "because it was in the remit of the Minister for Finance." I had responsibility for consumer affairs and, with the then Minister for Enterprise and Employment, Deputy Quinn, was drawing up the Consumer Credit Bill. I should not have been worrying my silly little head because these issues were being taken up by mandarins in the Department of Finance—

Mr. O'Toole

All men.

Ms O'Rourke

—and the relevant Minister for Finance, now our esteemed Taoiseach. I recall being nonplussed. If one goes to buy a suit and there is something wrong with it, one will just leave it and go on to the next shop. One does not leave one's money if one does not like the garment. However, we leave our money and expect to be treated as consumers but we are not.

I now come to the actual villain of the piece. The ECB made the cut which everyone was expecting. As the Minister of State said, this is a small open economy and any twist or turn in these matters improves or disimproves the situation to a large extent, more so than in the case of large countries. We depend very much on these fluctuations. Who gave the banks and financial houses the authority to say it was not in their competency to pass on to consumers the benefit of the interest rate cut? No one gave them that authority. I am aware they serve their boards of directors with escalating profits each year. I am not jealous of them – I do not want to sound as if I am looking for these millions, not a bit of it. However, they cannot say they are failing their boards of directors or shareholders. They certainly are not, rather they are giving them huge value for their investment, which is good to see in a market. It is obscene of them and irregular in the proper meaning of the word not to pass on what has been given and say they will keep it. This is the consumers' money.

Apart from the individual consumers being thwarted by the banks' arbitrary decision, there are also the business community and the wider implications for the country. In the United States the consumer confidence index is the one index which indicates how the country is doing. If consumers are spending, the country is operating and vice versa. This is causing damage to the country as well as to individual consumers. It is extraordinary in 2003 to have a statement, “It is not in our competency to pass it on”. I am interested in the Minister of State's statement that the financial regulator now intends to carry out a survey of interest rates in respect of various lending and borrowing rates and pass any relevant information to the Competition Authority in the context of its study of the banking industry. I hope it will hurry with it and the findings are issued warts and all.

Reference was made to the fact that the financial institutions pretended to be in competition with one another in order that we would be scurrying like beavers from one institution to another. They are not in competition with one another. They are in a cosy club, peopled in the main by men and those who do not intend us to get any advantage in being members of the European Union. Surely if we are into showing off the advantages of the Union, it should be done when the ECB reduces interest rates. Let us contrast the position with the ECB increasing rates. I guarantee that within one hour the competency would extend to increasing rates. This is a warning shot across the bows of what has happened this week.

I read an interesting newspaper article which stated the Minister for Finance would have to look again at the levy he was charging banks. The statement was not attributed to the Minister but one could read between the lines –"Buck up, boys, or you will have another big levy imposed." I know the Government cannot say this openly. The financial regulator, the Director of Consumer Affairs, Ms Foley, and the Competition Authority are looking at the banks but it is we, the little people, who stood to lose during the week if action had not been taken. The country as a whole stood to lose in an economic sense if the benefit of the interest rate cut had not been passed on.

I thoroughly bewail and condemn what was clearly a looming aggrandisement and arrogant action by the banks and financial institutions which very quickly came to heel on this occasion, at which I suppose we have some sense of atavistic pleasure. It was dragged out of them as if they were guarding banks of gold and we were the predators. They are the predators, not us.

Mr. O'Toole

I wish to share my time with Senator Ross.

Acting Chairman

Is that agreed? Agreed.

Mr. O'Toole

I listened to the Leader's list of A words when winding up. I have seven C words in front of me, which I hope to get through in five minutes: currency, consumer, competition, cartel, conspiracy, criminal and confidence. This is the first benefit of the currency in real terms that people see. There are others but this is one clear benefit to consumers who are the key people in all of this. We must ensure they get a return from our involvement in the currency. The whole issue of the Competition Authority brings us back to the point I have been making on a regular basis, that is, it should have the structures and resources to deal with these kinds of issues. One cannot send Detective Plod out to see if the banks are working in a cartel. One needs people who are highly competent and confident, well used to how the banks do their business.

Ordinary people do not realise that for the banks to operate in a cartel in this situation is a criminal act. This is not understood by them. It would be very good for public representatives if ordinary people in the street knew that the legislation we have passed in these Houses protects them from being victimised in these situations. It would also be useful for us to ensure that what we intended in the legislation actually happened. This is the reason the Competition Authority needs to be supported.

There has been a conspiracy in regard to this issue, the financial institutions are operating as a cartel. I do not think that anyone from the banking business could say to me with a straight face that there was no contact between any of the main financial institutions on this issue. Of course, there was, and it continues to be the case. This, effectively, could be proven to be a criminal act. People have recently begun to understand that insider trading is a criminal offence. It would be useful for the message to go out that it would be a criminal act if the banks acted in concert on this issue. Therefore, we should make it clear to the banks and financial institutions that we will ensure the focus is on them and that the matter will be investigated fully.

This is hugely important at a time when the economy is on the verge. PricewaterhouseCoopers spoke yesterday about significant growth in GNP next year. All this depends to a great extent on consumer confidence. As a confidence building measure, nothing would be better than for consumers to see merit in what is happening and have a sense of confidence in themselves, their lives, the economy and the main players in the economy. It must be regarded as utterly unacceptable to us that the rate cut made by the ECB should not be passed on to the consumer via the banks and the other institutions.

I first recall being in a bank, with my grandmother, when I was about four years old. At that time there was a huge element of deference to banking. There was a rather plummy and arrogant man behind the bank counter, and I always remember my grandmother saying to him: "Young man, your job here is to count my money. I expect your full attention, and I expect you to remember that while you are there and I am here, you are my humble servant."

Ms O'Rourke

That is the point.

Mr. O'Toole

It is a good message to be sent out at this time from my grandmother Breegy Fitz to the banks of Ireland.

Mr. Ross

I am sure the Senator's grandmother had plenty of money. Otherwise she would not have treated any bank with such courage. That is the only moral one can draw from that story.

I endorse what everyone has said this morning. To me, what has happened regarding the banks and the ECB cut is simply theft. It is subterfuge, but it is theft. There is only one purpose to ECB cuts. Whether the cut is half a point or a point, it results from the appalling state of the European economy. The rate is cut because the European economy is sluggish. It is an effort to put more money in people's pockets in order to get the economies moving. That is all. It is a very simple, unsophisticated exercise, done through the banks.

Under the present system, the banks are not meant to pocket any of this money. It is understood that they will pass it on. They are taking advantage of the situation, which is, as the Taoiseach rightly said, immoral. I applaud the Taoiseach, the Tánaiste and the Minister for Finance, Deputy McCreevy, for bringing these people to heel.

It was obvious to everyone last Thursday and Friday that when, as usual, no announcement was made by the banks, they were intending to maintain the loan rate. They were wondering how much they could keep and what they could get away with. They knew there would be an uproar in the media and that consumer groups would be upset. They did not think the Government would intervene in the active way it has done. It is wonderful that it did so. The Government does not, and can not, set interest rates, but if the banking institutions wanted to pick an issue over which they would fall out with the Government – and they need each other – this was the wrong one.

To a large extent, the banking institutions have now capitulated. As Senator O'Higgins said, AIB has not capitulated quite to the extent of the others, because it claims it was already offering the cheapest mortgage rate. Its rate is now coming very close to the others, which is clear evidence of the existence of the cartel which Senators O'Rourke and O'Toole spoke of. I cannot quite remember the figures, but they are now very close.

Ms O'Rourke

Yes.

Mr. Ross

With AIB having cut its rate by a smaller amount, the rate difference between the institutions is now so small that inertia exists, and people have no incentive to switch to other institutions. The banks know this. I am convinced that, as Senator O'Toole said, there is a cartel operating, that telephone calls are being made between banks, and that they agree on rates and on what action they should take. At this stage they hardly need to make telephone calls, because they can move in tandem. They understand each other and their language so well. One day it is one person's turn, another day it is another's. This crucifies the consumer, who is helpless in the situation, as illustrated in the tale Senator O'Toole told about his grandmother. The most vulnerable people are the people who suffer the most in this situation.

Though bankers try to confuse us, banking is not a sophisticated business. It is a matter of merely making a margin. The banks are not passing on the savings. They make most of their money on deposits, paying 0.1% interest while they themselves obtain 1.99% on those deposits. There can be no easier business. It is not very sophisticated. They then confuse us with jargon, with words like competency and capacity, and make it all sound difficult, which it is not.

Savers face extraordinary difficulties. In the other House, Deputy Richard Bruton articulately pointed out one aspect of the fall in ECB rates which has not been accentuated. The rate cut should have been more than 0.5%. The cuts made by the Irish banking institutions should have been greater, because the rate cuts have not been passed on in full for several years. Far from it being difficult for the institutions when ECB rate cuts are made, they are making money from them. They have been widening their margins on mortgages and lending during this period.

We should not forget credit cards. This is the greatest scandal of all. The credit card rates have not been cut and remain at 17% or 18%.

Mr. Minihan

I welcome the Minister of State to the House and I thank the Leader for facilitating this debate. As previous speakers said, it is very simple for people to remain quiet on this issue and hope that the banks can get away with the actions of recent days. We welcome the concerted effort by the Government in highlighting this issue and bringing to bear some moral authority on the banks. Statements such as those made in this House help to add to that campaign to make the banks face up to their responsibilities. The recent ECB cut must be welcomed. It will give a major stimulus to enterprise and investment across the euro zone. That is badly needed, because the euro zone economy is effectively stalled.

The economic situation in the major Euro zone countries is currently quite depressing. I will put the figures on the record of the House. In France, growth this year will stand at 1%, while unemployment is over 9%. In Italy, growth for 2003 will be less than 1%, with unemployment over 9%. Most worrying of all is Germany, where growth this year is anticipated at 0.2%, while unemployment is over 11%.

The reduction in interest rates should boost business confidence, and will help to stimulate job creation through new investment. It will also help to stall the upward movement of the euro, which has severely eroded the competitiveness of exports from the euro zone to the outside countries. The ECB rate cut is positive in this sense, and we must also consider the implications for the Irish economy. We will, however, lose the positive benefits if the lending institutions do not pass on the rate cut to the customers. The Government has no power to direct the banks to do so, but the moral initiative being taken by the Government in the statements of recent days, and this debate which has been facilitated by the Leader, should help bring the institutions to their senses on this issue.

Banks do well out of the Irish economy. They enjoy good margins and earn hefty profits. I urge them to look at the long-term picture rather than at short-term issues. I will give an example of what the benefits for the institutions would be in stalling any decision to pass on the cuts. One third of total lending in this country is accounted for by mortgages. That accounts for €46 billion. If that figure is divided by 0.5%, it works out at €230 million per annum. If the latter is divided by 365 days, it rounds off to €630,000 per day. Therefore, for each day that the banks delay passing on the cut, their profits are increased by €630,000. One can see the sense on the part of the banks in delaying passing on any such cut to consumers.

The right thing for the banks to do would be to pass on the benefit of the ECB rate cut in full to consumers. Any decision not to do so damages the standing of the lending institutions among customers and, in particular, the business community. In the long-term, it will only encourage them to take their business elsewhere. I urge the banks to face up to their responsibility, consider the long-term interests of the economy and pass on this reduction in full.

Mr. McDowell

The thrust of what has been said in recent days is interesting and correct. There is clearly a moral perspective and an aspect of fairness to this issue. The financial sector is the most profitable in Ireland. On occasion, the profits of financial institutions border on the immoral. We are all customers of the banks and we are more than entitled to insist that some of those profits be passed on to us.

What was the policy basis for the interest rate reduction in the first instance? I would be among those who would say that the interest rate regime we had here in recent years was not suitable. We have had an economy with double digit growth, whereas interest rates ranged between 3% and 3.75%. The economy was galloping away, while interest rates were encouraging the growth of inflation. That is now no longer the case. The ECB made its decision to reduce interest rates because it recognised, belatedly, the need to stimulate growth in the eurozone area. For once, that decision is right for Ireland, because, like those elsewhere, we need to stimulate growth.

Much of the focus in the debate has been on domestic borrowing, mortgages in particular. We should, perhaps, be looking more at business and at the need to use the interest rate reduction for the purpose for which it was intended, namely, to stimulate the economy. We should have more focus on the rates of interest paid by business. We should not be looking only at personal overdrafts, we should also consider business loans. The banks, which still frequently insist on the provision of personal guarantees, are still screwing small businesses by charging them interest rates of 10%, 11% and 12% when inflation is running at less than 5% and their wholesale interest rates are 3% or lower. This is intolerable in light of the economic position in which we currently find ourselves.

The banks must know this because bank managers are interviewing people with business ideas who, perhaps for the first time in a few years, are under pressure because their cashflow is not as good as it used to be and customers are not as plentiful. The banks know that small businesses need a break and we need them to provide it. We are not merely talking about these businesses, we are also concerned about their employees. The economy needs the stimulus to which I refer in a way that it has not done for a number of years. It is imperative that the banks pass on the rate cut.

The banks have, belatedly, passed on the rate cut to those with mortgages and that is what concerns most individuals. However, we need to focus on the other rates – not just those relating to overdrafts or credit cards, which are obscene, but also on that relating to business.

It is worth considering the ECB's remit. It is interesting that those at the bank appear to have twigged what is at stake. I was always concerned that concentrating too much on the inflation target was a mistake. I believed that there should be a requirement on the ECB to take into account the general conditions of the eurozone economy, growth, employment, etc. The penny – or the cent – appears to have dropped with the ECB in recent months. However, there is a need to go further. When we are reviewing the stability pact, we must look at the remit of the ECB. It may have been good enough for the Bundesbank, between the 1960s to the 1980s, to deal purely with the German inflation target. However, that approach is not good enough in the 21st century for the eurozone as a whole. The ECB must be given a much broader remit to allow it to look at the overall needs of the eurozone economy.

Interest rates on credit cards are utterly obscene. How can banks, which make over a €1 billion profit per year, possibly justify charging people – assuming that they are not landed with surcharges for failing to make monthly repayments – 18% to 22%? Inflation is 4.8% at present, while wholesale interest rates are 2%. The banks, therefore, are making profits of between 16% and 20%. The message needs to go out, loud and clear, that this is not acceptable.

I endorse everything that has been said by others in respect of the impact of the rate cut on mortgages. However, we must also appreciate that there is a need for small businesses, in particular, to obtain the benefit of the cut soon. If they do, it will hopefully feed through to better growth and employment for the remainder of the year.

Mr. Leyden

I thank the Leader for giving us an opportunity for a timely debate on this matter. It is tremendous when the House can react so quickly on an issue. I also thank the Minister of State for coming before the House.

I was interested in the Minister of State's comment that "The level of interbank interest rates is a matter for the European Central Bank, which is entirely independent of any Government in relation to its monetary policy activities". If this information was circulated to Gordon Brown, Tony Blair and the UK electorate, it would not encourage them to join the eurozone. The British Government has total fiscal control at present.

Ms O'Rourke

No, the Bank of England is independent.

Mr. Leyden

Yes, but at least it is in England and under the jurisdiction of the British Government; it is not in Germany.

I appeal to the banks to bring down their costs. I commend those who have already acted, including the Bank of Ireland. However, I understand that the AIB has only grudgingly reduced its rates by 0.34%. This must be linked to the AIB's overseas situation and the $670 million which was stolen from it. All AIB customers and staff are paying for this. I am aware that employee's profit-sharing dividends, etc., have been reduced, which is regrettable. As the Leader stated, if the rate had gone up by 0.5%, within hours it would have shot up without any difficulty.

I would oppose any amalgamation between the AIB and Bank of Ireland, because an institution of that strength and size would not respond to public criticism. There is, at least, some element of competition in the market, but it is obvious there is collaboration on interest rates. The Government cannot get involved, but I commend the Minister for Finance for raiding the dormant accounts. That was a great achievement and it is a credit to the Fianna Fáil-Progressive Democrats Government which decided to take action in this regard. We are very much on the left of Irish politics and we are not prisoners of the banks. The Leader is certainly not their prisoner because she was prepared to allow the debate to proceed.

Ms O'Rourke

They have not enough money for me.

Mr. Leyden

The Leader is independent because she does not depend or rely on the banks.

When I served in the Lower House, I made a statement on banks and the unsatisfactory face of Irish business. A short time afterwards I was involved in negotiating a loan for a house and my file in the bank contained all the references I had made to the bank in the Dáil Chamber—

Ms O'Rourke

About the bank?

Mr. Leyden

Yes. The bank manager opened the file and said I had certain strong views on banking services.

Acting Chairman (Mr. Higgins)

Will the Senator name and shame?

Mr. Leyden

It was the Bank of Ireland in Roscommon. I will not name the bank manager, as he is a gentleman and he approved my loan application.

Mr. Minihan

If he had not the Senator would name him.

Mr. Leyden

I was taken aback.

Ms O'Rourke

Big brother was watching the Senator.

Mr. Leyden

I made a major attack on the banking services at that time. The banking industry is conscious that this debate on banking services is taking place in this House.

Ms O'Rourke

People are checking the websites.

Mr. Leyden

Under the dormant accounts initiative around €200 million was raised, which otherwise would have gone directly back to the banks. That money would not have been brought forward.

Consumers should check on screen the accounts they have in their banks. I found recently that I had a small amount in an account, but if I had not claimed it, I would not have been told about it. I duly withdrew the amount and closed the account. There was another notice on the site on screen and when I alerted someone to it, that notice did not appear on screen when the person went to the bank the next day, but it subsequently reappeared. There are many things happening in the banks. An enormous number of accounts are being concealed by the banks and if they can get away with it, that revenue accruing from them goes into their profits.

The banks also hold in trust documents and bonds dating back perhaps 50 to 100 years and eventually they will slip back into the banking system. Somebody will raise that issue some day. I call on the Minister for Finance and his senior officials to carry out – not a trawl – but at least to indicate to the banks that such documents are the possession of members of the public. I had reason to check a file recently and I noted that some of these documents have not been touched for 50 years.

Mr. P. Burke

The Senator could be in danger of losing his holy communion money.

Mr. Leyden

These are documents held in trust or safe keeping by a bank and they may include prize bonds, other bonds, shares or certificates. The Government should direct that this area be investigated, as this is an important issue.

I appeal to the AIB, as I am a customer there, to bring down their interest rates to the minimum level possible. Savers are getting a bad deal at present, yet nobody seems to be expressing concern about those who have savings in the banks. The interest rate for savings in negligible at present and virtually no interest is accruing on savings.

A rip off is taking place in regard to credit cards. We need a strong consumer organisation to raise this issue. While the Irish Consumer Association is doing its best, it is underfunded. The State should provide some assistance to that association to help strengthen it in order that it can play more of a watchdog role in regard to all consumer issues.

Mr. P. Burke

I agree with what previous speakers have said on this issue. It is obscene that the banks are charging anything from 16% to 20% interest on credit cards and in some cases, as Senator McDowell said, surcharges also apply. The Government should directly tackle the banks on the interest they charge on credit cards.

I fully agree with what has been said about the interest being charged to small businesses which are under more pressure now than ever before. The manufacturers of giftware alone are under enormous pressure. A manufacturer of giftware in Galway, Carrigaline Pottery, which has been in existence for the past 50 to 60 years, is ready to close; Tipperary Crystal is up for sale; a company which manufacturers jewellery in Dublin is ready to close; and workers in Waterford Glass are not working one week in every six weeks. The giftware industry is under enormous pressure. We are nearing the day where no giftware will be manufactured in Ireland and any giftware that will be sold here or sold on behalf of companies here will be outsourced in countries such as Taiwan, South Africa, the Middle East and so on. These small companies are under enormous pressure from banks to close. They are under pressure on a number of fronts, not least because of high interest rates, but also because of high insurance premia and other costs.

The high cost of insurance is an area that should also be tackled. If we can put pressure on banks to bring down the cost of interest rates, surely we can put pressure on insurance companies to bring down the cost of insurance, given that high insurance premia place enormous pressure on companies.

I fully agree with what has been said about small businesses. They are being ripped off by banks and they have to pay enormously high interest rates over and above the interest rates that have been set. In many cases, they also have to pay surcharges. This is an area the Govenrment should examine. Perhaps we again need a State rescue bank. We had one a number of years ago, but it closed.

There are quite a number of small businesses in the manufacturing area, and I outlined a number in the giftware sector. The people engaged in those businesses are under severe pressure. Perhaps this is an area where the Government could step in with a rescue package. I fully support what other people have said. I thank the Minister of State for his contribution and the Leader of the House for taking this matter.

Mr. J. Walsh

We all welcome the European Central Bank cutting the interest rates. That is good and from a European point of view it is important that our businesses are competitive vis-à-vis businesses in the United States. Its interest rates at this stage are still marginally lower than the European Central Bank rate.

The interest rate was cut primarily to stimulate the economies in central Europe, particularly Germany which is going through a difficult economic situation. The Minister of State rightly pointed out that because we have such a very open economy anything that stimulates demands within Europe will have knock-on commercial effects for Irish businesses. In that regard, the interest rate cut is welcome and it is also a fairly significant one designed to bring the currency relationship with the dollar a little lower than the euro had been achieving.

For quite some time before we joined the single currency, the member states had been particularly successful in the EMS whereby they tried to regulate the relationship of the various currencies in Europe within certain pre-agreed parameters, which from time to time were reviewed. When we took the next step to introduce a common currency among most of the member states of the European Union, it might have been opportune on the internal stage to institute a EMS type system where perhaps, in so far as it can be regulated, the relationship between the dollar, the euro and the yen and probably in time the yuan, the Chinese currency, would have been regulated. China is a growing economy and probably in the next 40 to 50 years it will be the number one economic unit in the world. Such a mechanism would do a good deal to address the instability, which is an indeterminate when people are doing business and which artificially distorts trading across the global scene, driven by market forces or whatever else. Prior to entering the euro, the EMS was successful in maintaining a semblance of stability which helped the economies of EU member states. Perhaps that is something that might be examined.

The debate was inspired by a fear that the banks would not pass on the interest rate cut in full to consumers. In terms of political leadership, the Taoiseach, the Tánaiste and the Minister for Finance made their positions very clear. No doubt this had some influence on the decisions made by most banks, even if, having spoken to bankers yesterday, some are aggrieved that they will not get the credit for passing on the full 0.5% cut.

Ms O'Rourke

They made it too late.

Mr. J. Walsh

On the other hand, banks can often be an easy target. It is important that the banking system has the necessary solid foundation to allow the rest of the economy to survive. I would not be entirely critical of some of the decisions banks make.

An area for and in which the State has a definite responsibility and involvement is competition. Banks openly concede that they compete on the quality of services but not on cost. That is not good enough if we are to have a proper and effective competitive environment. This should be tackled. It is probably in the interests of the main banks to embrace the spirit as well as the letter of competition because, if they fail to do so in the long run, it will only give rise to other regulatory steps being taken to ensure a competitive environment, and these regulations may not be in the interests of banks or their shareholders in the medium to long term. I encourage them to take these steps and compete on price.

There is also a need for greater transparency. The issue of small businesses has been raised in the debate. Bank charges, which are far from transparent, are undoubtedly a major issue in this regard. It is clearly specified what rate of interest is being paid.

That said, there is a responsibility on consumers. I have noticed in recent years since the country has become more affluent that consumers in a wide range of areas are not nearly as discerning as they should be. We should remind them that, if they vote with their feet when it comes to purchasing goods, it is the real essence of and determining factor in competition. If they did this with banks which are not passing on the full interest rate cut, we would see a change of attitude for the better.

The Minister and the Department could monitor this to see if other banks which have conceded the 0.5% interest rate cut are reluctant to accept customers with borrowings from banks which have not passed on the rate cut. This is where competition can be blurred. I would like to think that the route we are taking is one that will lead to greater competition because ultimately the market determining attitude and actions is the best possible way of achieving a better deal for consumers.

One other issue to which I wish to draw the attention of the Minister of State is the direct mailing of people offering them loans which they have not sought or applied for at terms which are often far from competitive. I have a serious concern about this which others have also expressed in recent days, namely, that people would be lulled into consolidating other loans or taking out new loans, often for consumable items that do not have an ongoing financial benefit. This direct mailing practice should be examined. Financial institutions should be allowed to advertise in the media but we should seek to outlaw direct mailing as the consequences can be serious for individuals lulled into availing of what they consider easy access to money at cheap rates but which are not cheap in practice as they discover subsequently.

Ms O'Rourke

I thank the Minister of State and his officials for attending the debate which allowed for a good and broad range of views to be expressed.

An Leas-Chathaoirleach

When is it proposed to sit again?

Ms O'Rourke

Next Wednesday at 10.30 a.m.