Q&A

What it means for bank customers

What does the merger of AIB and EBS building society mean for customers of the banks?

In the short term, there is no impact. During the merger process, customers can continue to do business with either bank as they did before. However, over time, the fuller banking services of AIB will become available to the customers of EBS, Minister for Finance Michael Noonan told the Dáil.

Customers will also retain the protection of the State guarantee for their deposits. In the interim, EBS customers “can continue to conduct all their business as normal with no change to their existing terms, conditions and relationships”, said the building society.

Meanwhile, the Central Bank’s director for consumer protection, Bernard Sheridan, said the bank would monitor the institutions closely during the transition period to ensure they acted in the best interest of customers.

The lenders are set to write off massive losses on their mortgage portfolios. Does this mean customers can stop repaying their loans?

No. The question of a formal debt forgiveness policy is not addressed in the Central Bank’s report.

The results of its stress tests show that four lenders – AIB, Bank of Ireland, Irish Life Permanent and EBS – are set to write off between 4.1 per cent and 6.7 per cent of their residential mortgage loan books over the next three years.

Over the lifetime of the loans, losses could be between 7.1 per cent and 12 per cent, according to BlackRock, the consultants hired by the Central Bank.

These forecasts are based on mortgages that have either already gone bad or are expected to become impaired due to adverse economic conditions.

But with the total bank bailout bill running in excess of €70 billion, calls for debt forgiveness for individual borrowers are unlikely to go away – despite the potential moral hazards. Central Bank governor Patrick Honohan indicated yesterday that the issue was a question for another day.

In its statement, Flac, which provides free legal aid centres, said the bank stress tests showed a “lack of focus” on struggling homeowners. Noting existing measures such as the moratorium on family home repossessions, Flac director general Noeline Blackwell said other solutions were needed “without delay”.

Tracker mortgages are a source of “built-in unprofitability” for Irish Life & Permanent, according to the Central Bank. Is there any chance lenders will break the terms of existing tracker mortgages in order to recover losses?

No. The Central Bank reiterated that it was not possible for lenders to renege on the contracts they signed with tracker mortgage customers. “They need to stand by those obligations,” said the Central Bank’s head of financial regulation, Matthew Elderfield.

Tracker mortgage customers benefit from the lowest interest rates in the country, as the rates charged on the loans are set at a fixed margin above the European Central Bank base rate. This rate remains – for now – at a historic low of 1 per cent.

Lenders have increased their standard variable and fixed rates in order to reflect the more expensive cost of funds in recent years, but tracker customers have escaped. This is why the Central Bank takes a dim view of lenders who encourage borrowers in arrears to abandon their tracker contracts as part of any loan-restructuring arrangement.

However, it would be wrong to say that all tracker customers are enjoying bumper personal finances, as these loans were typically sold to borrowers who bought properties at the peak of the property market, meaning the absolute value of their mortgages is high.

Has the Central Bank considered whether the latest €24 billion recapitalisation of the banks is fair?

No, and it is not pretending that it has. “I’m afraid I can’t help on the fairness issue,” admitted Prof Honohan yesterday. The Central Bank’s recommendations on the required capital injections into the four lenders were based on “expediency” and delivering the best possible “net gain” for Ireland, he said.

“It doesn’t score well on fairness,” Prof Honohan added. While other approaches to fixing the broken banks might superficially score better on fairness, going down those alternative routes would be a case of cutting off our nose to spite our face, he believed.

Meanwhile, Mr Noonan did not mention fairness in his speech to the Dáil.

The sum of €24 billion earmarked for the four financial institutions yesterday is the equivalent of more than two-thirds of the projected total tax take for 2011.

It equals the full amount of income tax and VAT that the Revenue expects to collect this year.