Let’s take it as read that banks have massive credibility issues. Look no further than the influential annual Edelman Trust Barometer, which has consistently ranked financial services as the least trusted industry globally in the past decade.
The latest Edelman report, published in January, showed the level of trust in the Republic of financial services firms remains lower still – with an index reading of 45. Anything below 50 and you’re in the proverbial doghouse.
Irish banks have provided plenty of reasons for the dismal scoring – from reckless lending during the Celtic Tiger years that led to €64 billion of taxpayer rescues and, ultimately, the State being made a ward of the bailout troika, to the tracker mortgage debacle, which has cost the industry €1.5 billion and counting.
The current political brouhaha about how banks are continuing to apply interest on loans subject to payment breaks during the Covid-19 pandemic only adds to the narrative.
It’s a far cry from the opportunity banks saw in early March to cast themselves as the good guys in an unfolding crisis that, for once, was not of their making.
The banks announced, following a high-profile meeting with Minister for Finance Paschal Donohoe the day after St Patrick's Day, that they would be offering payment breaks on mortgages, personal loans and business borrowings for three months. In reality, most had already said seven days earlier that they would offer payment pauses.
They were among the first across Europe to signal plans for such relief. But there was self-interest here, too. In the home of the continent's worst banking crisis, Irish banks knew they needed to act fast to avoid tens of thousands of customers falling into arrears as they lost their jobs or saw their salaries cut as the economy went into lockdown.
Problem loans
There were two overriding objectives when the breaks were agreed: to make sure they would not affect borrowers’ credit ratings or force banks to account for them as problem loans, damaging their balance sheets.
To do this, they looked to EU banking rules, introduced in 2014, which say that if interest isn’t being accrued on a loan, it is taken as a borrower’s unlikeliness to pay – tipping them into default territory. The banks decided on the back of this to continue to apply interest on loans subject to payment breaks.
The European Banking Authority (EBA) came out with guidelines on April 2nd. These allowed for payment moratoria that "only change the schedule of payments, namely by suspending, postponing or reducing the payments of principal amounts, interest or of full instalments, for a predefined limited period of time". The EBA added that "no other terms and conditions of the loans, such as the interest rate, should be changed".
Banks took this as supporting their view that interest needed to be accrued. The Central Bank fed the Minister for Finance this EBA line when he answered a parliamentary question from Sinn Féin TD Pearse Doherty on the matter on June 9th.
Then, on June 22nd, the Central Bank issued a letter to Doherty that the guidelines “do allow for payment moratoria to be applied whereby interest does not accrue for the moratorium period without, of itself, triggering forbearance classification or changes to capital requirements for the duration of the payment break”.
Why was there no mention of this in a June 8th letter from the regulator to banks chiefs on how banks needed to approach payment breaks with customers in mind? Then again, there is no record of the banks asking the question.
Geographical difference
In most EU countries that have introduced mortgage breaks, interest continues to apply during the period. In Spain, it does not, because the local government brought in laws banning interest accrual. In Belgium, interest isn't being charged where the borrower is on a low income. But to access the scheme in the first place, Belgian borrowers cannot have been in arrears before or have more than €25,000 of savings.
The EBA has clarified this week that it’s open season when it comes to the accounting treatment of payment breaks, but the State’s five retail banks have said they will continue to charge interest.
A decision not to apply interest for six months on the 70,000 or so mortgages currently subject to payment breaks would cost banks €150 million in lost income at a time when they are already facing losses this year, analysts at Goodbody Stockbrokers estimate.
On the other hand, price comparison website Bonkers.ie says that rolling up interest and adding it to the principal at the end of the break period would add €4,300 to the lifetime costs of a €300,000 mortgage with 30 years to go. There is a cost, either way, and it must be borne by someone.
Is accrued interest a price worth paying for access to a payment breaks scheme that has been effectively open to any borrower who mentioned Covid-19 on a call to their bank looking for relief?
Banks, after all, were forced by the scale and speed of the crisis to abandon normal moratorium criteria, such as seeking proof of employment or savings – even if there were some initial problems getting that message to frontline staff in some.
If there was no cost involved for borrowers, what vaguely financially literate person would pass up on a free holiday? Where would that leave the banks, in which taxpayers continue to hold large stakes? These are banks that have yet to repay all their crisis-era bailouts and have seen Covid-19 kill off any hopes that they will do so any time soon.
The banks, which took so long to deal with mortgage arrears after the last crash, must ultimately be judged following the pandemic on what restructuring or forbearance they offer those borrowers currently on payment breaks who have no prospect of returning to payment breaks after six months.
A fresh arrears crisis is the last thing we need.
