Representatives of the country’s main banks have defended their policies around the passing on of interest rate increases to customers when they appear before an Oireachtas committee later.
In opening statements delivered at the Committee on Finance, Public Expenditure and Reform, and Taoiseach, Banking and Payments Federation Ireland (BPFI) claimed banks have taken a balanced approach to passing on rising rates as they are acutely aware of cost of living pressures facing customers.
“And while much has been made and commented upon concerning savings and deposit rates, this must be looked at side by side with the fact that banks in Ireland have also been considerably slower than their European peers in passing on interest rates to mortgage holders,” Brian Hayes, Chief Executive of BPFI said.
“In fact, when comparing the pass through of rates across the 20 eurozone member states, Irish banks have passed through the second lowest increase in mortgage interest rates between May 2022 and July 2023.”
“While the ECB has raised interest rates by 4.5%, the average rate on new mortgages in Ireland has only risen by 1.24%, or less than a third of the full ECB increase. At the end of June this year, the weighted average interest rate on all outstanding mortgage loans was 3.4% for banks, 2.8% for “lending nonbanks” and 4.9% for the “non-lending non-banks,” he said.
Mr Hayes added that around 60% of all mortgages are currently insulated from rate rises as they are on fixed rates.
In his opening statement, AIB Chief Executive Colin Hunt said the bank has tried to bring a measured approach to lending and deposit pricing, mindful of the role banks play in implementing ECB monetary policy.
“In this context, we have refrained from passing the full impact of rising rates to our mortgage customers, who are facing other inflationary pressures,” he said.
“We have also positioned our deposit pricing for customers who may have excess funds in current accounts or low-yielding demand deposit accounts and who can now avail of higher returns of up to 3% in fixed-term savings products.”
“We will continue to keep our pricing policy under review as ECB policy evolves and, hopefully, inflationary pressures stabilise.”
AIB CEO Colin HuntMr Hunt said 60% of the bank’s mortgage customers are currently on fixed rates and so far it has not seen any material increase in potential or actual arrears.
While in his opening statement, Myles O’Grady, the Bank of Ireland Chief Executive, said the lender’s approach has been to respond to rate changes while doing all it can to ensure customers do not face a repayment challenge with their mortgages.
“For example, while the ECB has increased rates by 4.5%, we have increased fixed-rates by up to 1.75%,” he said.
“We’ve balanced this by introducing savings rates of up to 3%.”
He added that around 70% of the bank’s mortgage book is now fixed and the majority do not reprice until 2025 at the earliest.
“We’re very aware that some customers may get into financial difficulty and this is something we are closely monitoring,” he said.
But he also said it is not seeing any early signs of distress in the loan book.
Eamonn Crowley, the Chief Executive of Permanent TSB, said the bank never loses sight of the fact that higher rates can cause challenges and stresses.
“We are extremely mindful of the duty we have to our customers to support them when they need it,” he wrote in his opening statement.
“I think all banks have shown over the past 12 months that, contrary to what some commentators expected, ECB rate increases haven’t resulted in automatic mortgage rate increases across the board.”
Mr Crowley added that the bank has made five separate announcements since last November in which it has introduced new and better rates for deposit customers.
“They need to be rewarded and they need to see some benefit from the higher rate environment,” he said.
“Given that we have fixed term mortgage customers who locked in low borrowing rates for long terms, we now have a situation where some of our mortgage borrowers are borrowing at lower rates than we are paying savers on their money.”
Brian Hayes also defended the strong profits reported by banks in the first half of the year, by underlining the importance of having a performing, profitable banking sector and pointing out that banking is cyclical.
“Organic profits are the first line of defence against shocks to the economy. In addition, banks’ ability to raise capital when needed depends on their profitability,” he said.
“In the post EU Banking Union reforms, capital stacks, encompassing core EU wide and local capital add-ons has fundamentally altered the traditional banking model in Europe. Without capital there is no lending. Without lending there is no investment for households and businesses and customers across the system.”
While AIB boss Colin Hunt said as well as being needed to generate adequate returns, capital is used to build reserves and to drive continuous investment in digital and product innovation.
He also said the bank has a responsibility to make appropriate dividend payments to shareholders, including the State which holds 46% of AIB.
The banking leaders also addressed the Defective Block Redress Scheme and all claimed they are committed to working closely with customers whose homes have been damaged by mica, pyrite or other related issues.
BPFI boss Brian Hayes said it has been made clear that there is a need for finance for some homeowners to begin remediation works on their properties, prior to accessing the funding available under the redress scheme.
“As a result, BPFI and our member banks have submitted a proposal to the Department of Housing and we are engaging with the Department to find a solution that can work for affected homeowners,” he said.
He added that BPFI has submitted a request to the Minister for Housing to establish an Oversight Committee, tasked with overseeing the implementation and roll-out of the Defective Block Scheme and this has been agreed to.
Under questioning from Sinn Fein’s Finance Spokesman, Pearse Doherty, about scheme, Mr Hayes said the BPFI would meet the Department of Housing on the matter again this week.
He said the ambition is to create a product that would provide interim funding to customers who are part of the scheme.
“Our suggestion to the department broadly is that…we can provide maybe 10-15% of the overall grant upfront, because the current legislation doesn’t allow for that grant money to be paid upfront, on the basis that we will get the money back once the initial tranche is made from the housing authority,” he said.
He added that the reason the initiative would be structured this way is because alot of the people concerned would not be able to get a loan on a traditional basis for the work.
He said the redress process would need everyone around the table and will take a long time, but has to be done right.
The BPFI boss also expressed concern that without guidance there was a risk that some of the home owners could be overcharged and scammed by builders who were doing the work on their houses and public money wasted as a result.
Asked by committee chairman, John McGuinness, what his view is on the refusal of credit servicing firms or “vulture funds” as he called them to appear before the committee, Brian Hayes said he wished they would.
Mr Hayes said that although the firms are members of BPFI, he could not make them attend but would be happy to try to facilitate it.
Mr McGuinness provided examples of the difficulties that customers were facing in contacting the credit servicing firms.
He added that he would take steps to name them if they do not attend as it was time for the Oireachtas and the committee to “get serious” about these funds.
Bank of Ireland CEO, Myles O’Grady, also used his opening statement to reference the recent IT outage at the bank and said it fell short of the bank’s standards.
“We don’t always get it right,” he said.
Mr O’Grady said the bank’s objective overall had been to make sure no customer suffered financial detriment as a result of the bank’s technology outage.
Susan Russell, Chief Executive of the Retail Ireland division at Bank of Ireland, said because some customers were not able to check their balances during the outage they found themselves in an unauthorised overdraft.
She said the bank had immediately put in place a dedicated phone line for customers to contact the bank as well as a 90 day fee free overdraft.
“In addition, we are now looking to put in a 90-day free loan for customers,” she said.