THE GOVERNMENT has, for now, wisely stepped back from introducing legislation to compel banks to pass on European Central Bank (ECB) interest rate reductions to mortgage holders and other customers. Neither the Minister for Finance nor the Central Bank has the statutory power to do so, and Mr Noonan has accepted the advice of the Financial Regulator, Matthew Elderfield, that his existing powers which includes those of supervisory intervention – when allied to moral persuasion – may prove more effective in the circumstances. As Mr Noonan pointed out in the Dáil yesterday, it is not possible to control the interest rates charged to customers without also controlling the rates paid to depositors.
A banking system where Government sets deposit rates and controls interest rates would be a regressive development for the sector at a delicate stage of the banks’ financial recovery efforts. Banks would find it harder to secure funding, take longer to rebuild their balance sheets, and become less attractive to outside investors.
Certainly the Coalition’s handling of this issue has been unimpressive. In trying to be all things to all people the Government has risked satisfying none. With an estimated 100,000 variable rate mortgage holders in differing degrees of distress on their loan repayments, the Government was under some pressure to act.
Nevertheless, its efforts to force the banks to pass on the rate cut to their customers has proved both ham-fisted and counterproductive, with the banks very publicly rebuffing its request. Ministerial threats of legislation to force through rate cuts were followed by a decision by AIB (where the State’s ownership exceeds 99 per cent) to pass on the ECB rate reduction.
The present position remains unsatisfactory. A significant difference now exists between the variable mortgage rates that banks charge their customers. However, given that in the months ahead future interest rate changes by the ECB will almost certainly involve further rate cuts, the Government needs to reach some agreement in principle with the banks on how such rate reductions will be handled.
That will involve striking a balance between the need for banks to improve their balance sheets, and the need also to ensure that the difficulties of those 100,000 variable rate mortgage holders in financial distress are eased, and not further exacerbated.
And that difficult exercise may well require a more central involvement by the Financial Regulator.