Lenders increasing their margins despite falling interest rates

Financial institutions have increased their margins on lending products over the past few years, despite falling interest rates, a new study by the Irish Financial Services Regulatory Authority (IFSRA) has confirmed.

The financial watchdog's report points to evidence of "an upward drift" in the margins of lenders on variable rate mortgages since May 2001, while it found even more dramatic increases in margins for credit cards, overdrafts and loans over a five-and-a-half year period.

For these unsecured products, the spreads (the difference between the cost to the consumer and the official interest rate) are wider here than in other euro-zone countries, IFSRA said.

Rates for small business loans and overdrafts exceed the euro-area average to an even more pronounced extent, it added.

IFSRA started its "pass-through" study last year following criticism by the Taoiseach, Mr Ahern, that cuts in the European Central Bank (ECB) base rate were not being passed on quickly enough or in full to borrowers.

The Consumers' Association of Ireland said the study showed that the market for unsecured credit was dysfunctional and operated against consumers' best interests. It said the market was in need of radical reform and stronger forces of competition.

The average spreads on overdrafts widened from 5.41 percentage points in January 1998 to 8.8 percentage points in June 2003, while on credit cards, they increased from around 13.9 points to almost 15.9.

For personal loans, average spreads widened from 5.32 points to 7.67.

IFSRA is due to publish a cost survey on personal loans in September.

Deposit customers have fared somewhat better, as spreads have narrowed over recent years the study found. However, rates still appear to be lower than in the euro area, IFSRA said.

When assessing the speed at which the rate changes were passed on to mortgage customers, IFSRA considered six of the 19 rate changes, finding no evidence that lenders passed on increases more quickly than decreases.

But from late-1998 to late-1999, a failure to pass on official interest rate cuts in full resulted in a "significant" widening of spreads.

This trend was reversed following the entry of Bank of Scotland to the market in September 1999, which heralded a spell of competitive activity.

But reductions in the ECB base rate since late 2002 were not passed on in full, resulting in further drift.

However, IFSRA said the mortgage market generally offered good value to consumers when compared to eurozone rates.

The Irish Bankers' Federation (IBF) welcomed this finding but criticised IFSRA's methodology.

It said the ECB base rate did not represent the sole cost of funds for financial institutions and that the study contradicted Central Bank analysis showing that average Irish rates are below the eurozone average for over 94 per cent of household lending.

On variable home loans, EBS Building Society was found to have the lowest average interest rate at just under 4.5 per cent, while Irish Nationwide Building Society had by far the highest, at almost 6.75 per cent.