It may be necessary for someone to inform Ireland’s Taoiseach, Simon Harris, that the country’s government no longer holds control over its banks. Following the economic bailout, financial establishments faced scrutiny under the watchful eye of government-appointed board members, due to the state’s significant shareholdings in the banking sector. As those shareholdings progressively diminish, the dynamic is shifting; although Taoiseach Harris may find the continued criticism of banks politically beneficial during an electoral week.
This week, Harris called for a meeting with the banks, a command that could feasibly be brushed off by the independently operating financial institutions. However, it is unlikely to be ignored. Of particular interest will be the banks’ response in relation to a recent statement by the Banking and Payments Federation (BPFI), who highlighted, without named reference to the Taoiseach, that they had not elevated their variable and fixed rate provisions in line with increases determined by the European Central Bank. Moreover, they mentioned that they were lawfully restricted from pre-emptively indicating future rate adjustments by competition regulations.
Taoiseach Harris has expressed a desire for commitment from the banks to reduce interest rates in accordance with falls established by the ECB – a proposition which the banks suggest could invite unwanted inspection from the Competition and Consumer Protection Commission (CCPC), due to the prohibition of providing such advance notice.
It may be expected that the forthcoming meeting between Harris and the bank personnel will generate animosity; though it is arguably more probable that, with the election passed and the desire for a peaceful existence, a vague mutual agreement to cooperate going forward will be announced. Details on the extent of the bank leaders’ own public defence, apart from letting the BPFI handle it, will be noteworthy.
The Irish government has claimed that it has executed two-thirds of the Housing Commission’s recommendations – a statement that appears divorced from reality.
On a positive note, Irish banks have managed significant profits, which has attracted new contenders to the market to provide better lending and deposit options. Competitive market pressures are likely to coax the banks into action, rather than a formal request for a meeting on Merrion Street.
The truth of the matter is that large banking institutions have sustained their profit margins by providing savers with deals that yield little return. This practice consequently permits them to maintain lower mortgage rates, especially since the ECB has initiated a rate hike, excluding trackers, which by nature automatically adjust. This implies that savers, to some extent, are indirectly subsidising borrowers, particularly if they idle their spare funds in demand deposit accounts.
While tracker interest rates adjusted, other forms of mortgage rates didn’t witness a significant hike akin to ECB’s, thus they won’t correspondingly decrease in parallel. However, with recent months witnessing a trend for certain mortgages to undergo interest rate reductions, influenced by money market trends and revived market competition, banks are prompted to respond to changes threatening their profit margins.
Automatic reductions will be seen in tracker rates following ECB cuts. Overlooking the minor hike witnessed by other variable interest rates, Harris’ demand for a decrease for these rates implies only a percentage of loans, around 15%, are subjected to such non-tracker variable rates – largely older mortgages with less outstanding balance. With standard variable rates standing around 4% offered by the two largest lending firms, further cuts by ECB are necessary for these rates to fall. Other lenders charging higher variable rates will have to cut or decide to exclude dealings in this area.
However, the importance of government banking policy remains significant, promoting a stable environment that attracts new participants. Also, the combination of fresh competition as well as a decreasing trend in market interest rates has resulted in better fixed-rate options for new borrowers and existing borrowers nearing the end of their term. Many are now able to secure rates between 3.5% and 4%. Given that the ECB deposit rate is currently at 3.75%, it is expected that the status quo remains for some time with the best outcome being a minor potential decrease in these rates in the coming year and into 2025. While there are still some undesired fixed deals, switching lenders could help many attain lower rates. More people opting to do so only strengthens competition in the market.
The Taoiseach would do well to direct his energies toward the non-bank lenders who oversee loans for investment funds acquired from banks in the past few years, rather than dissipating his influence arbitrarily. A considerable number of these mortgages were delinquent loans, and in various instances, these bodies have followed ECB rises, escalating rates to 7-8% or even higher. Regrettably, due to subpar credit histories, involved borrowers are frequently unable to shift. A lucrative return is realised from these loans, which were procured for less than their original value.
Undeniably, stable governmental banking procedures still hold significance. They can potentially inspire new participants and maintain continuity in cash facilities and branch operations. Regulatory roles taken on by the State and Central Bank ensure compliance when borrowers encounter difficulties. Additionally, banks should be held accountable for their history of product innovation and delivering customer service. The sector’s lending is still governed by rules and stringent regulations established following the lenient regulation period preceding the crash. This raises pressing strategic questions that demand long-term attention.
However, resorting to old tactics such as putting pressure on banks to reduce their interest rates is merely playing politics. If the Taoiseach genuinely wishes to comprehend the options accessible to those facing the end of fixed-rate terms, he can readily refer to a variety of comparison websites. Regrettably, those who initially secured a fixed interest rate of roughly 2.5% in recent years will see a hike once their fixed term concludes. On a positive note, conditions are improving and most should be able to lock in rates in the realm of 3.5 to 4%. Regardless of what the Taoiseach espouses or accomplishes, it will not influence this situation.