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Sunday 4 December 2016

Dan White: Here's how to force stubborn banks to slash variable rates

Ulster Bank HQ in Dubin.
Ulster Bank HQ in Dubin.

Who would have thought it, the bank bosses are behaving like a bunch of, well, complete bankers!

Appearing before the Oireachtas Finance Committee earlier this week both Bank of Ireland boss Richie Boucher (annual pay €843,000) and Ulster Bank chief executive Jim Brown (annual pay €1.63m) refused to follow the lead of state-owned AIB and signal that their banks would cut variable mortgage rates.

Unlike AIB, whose boss David Duffy told the Committee last week that his bank plans to cut variable rates in June, both Ulster Bank and Bank of Ireland seem determined to tough it out and continue to gouge their variable rate mortgage customers.

Cue the usual hand-wringing from our political leaders with Taoiseach Enda Kenny yesterday describing the banks' refusal to cut variable rates as "unacceptable".

Sorry Mr Kenny, but this sort of limp-wristed response just doesn't cut it. I'm sure Messrs Boucher and Brown are quaking in their boots at the thought of the Taoiseach's dismay. Whatcha going to do about it Enda?

Determined not to be outdone, Tanaiste Joan Burton weighed in with her tuppence worth, suggesting that taxes on the banks would be increased with the bank levy, which currently raises €150m-a-year, being the most likely candidate.

For a normally sensible woman this was one of Ms Burton's dafter ideas. Firstly, an increase in the bank levy or any other tax on banks would hit all lenders and not just the institutions which refuse to cut their variable mortgage rates.

Secondly, it would be extremely difficult to stop the banks passing on any tax increase to their customers as anyone with a cheque book or credit card will testify.

So if Bank of Ireland and Ulster Bank are determined to tough it out and not cut their variable mortgage rates, is there anything the Government can do to force them to do so? Well, quite a lot actually.

The reason variable mortgage rates remain so high despite the fall in ECB rates is the absence of competition in the Irish homeloan market.

Several banks have left the Irish market making it virtually impossible for borrowers to switch mortgage lenders.

Meanwhile, new mortgage lending has almost completely dried up, having fallen by over 90pc from its 2006 peak.

The key to forcing the banks to cut their variable mortgage rates almost certainly lies with the reintroduction of competition to the mortgage market.

This could be done through AIB and Permanent TSB, both of which are over 99pc-state owned.

It is no accident that AIB was the first bank to announce that it would cut its variable mortgage rate. If it hadn't done so "voluntarily" then its shareholder, i.e. Finance Minister Michael Noonan, would almost certainly have ordered it to do so.

With the economy growing rapidly and the public finances back under control, the Government's borrowing costs have plummeted.

The yield or interest rate on 30-year Irish Government bonds is now down to just 1.5pc while ten-year bonds are yielding well under 1pc.

This gives the Government a powerful stick with which to bludgeon the banks that refuse to cut their variable mortgage rates into submission.

With a booming economy meaning that this country no longer needs to borrow as much to fund its day-to-day expenses and bond investors desperate for new European government bonds at a time when the ECB is buying back bonds, the Irish Government should go out and borrow several billion euro on the bond markets at the current ultra-low interest rates.

It should then lend this money on to AIB and Permanent TSB, order it to cut their variable rates much further and then aggressively target Bank of Ireland and Ulster Bank's best variable rate mortgage customers.

It is only when competition returns to the mortgage market and lenders start to lose their best customers to rivals that the banks will be forced to cut their variable mortgage rates.

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