Michael Noonan on why mortgage rates are so high in Ireland

Brendan Burgess

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Michael Noonan had a long interview on Pat Kenny Show yesterday. http://www.newstalk.com/Universal-Social-Charge-is-here-to-stay--Michael-Noonan

He gave his views on mortgage interest rates about 75% of the way through the first audio clip entitled “Noonan on the Budget, debt and the Fiscal Advisory Council”

(After a section on banking union, and common currency and monetary policy. And how the UK and the US is out of recession. And how there is a flaw in the European system. And how we could flog off our assets to the ECB. And how we could flog off AIB.

Noonan: We want to keep control of the banks. That we have influence over banking policy and not just through the Central Bank. That is why I am keeping 14% of Bank of Ireland and I have no intention of selling it. We need to influence policy…
Kenny. Mortgage rates in Ireland are about 2% higher than other parts of Eurpoe. Why?
Noonan: Because the banks are rebuilding their balance sheets!

Kenny: So they are taking the money? Why don’t we have RBS or Banco Santander who might lend to us at lower rates. We are still being screwed by the banks
Noonan: The good news is that Ulster Bank is going to continue in the country and they are very strong on the property side in Dublin city but they are also very strong on retail banking

Kenny: But they won’t break ranks with the other banks on those rates
Noonan: AIB have announced a small reduction and the way it will go is as the banks become profitable they will get competitive and with banking union there is nothing to stop European banks coming in now if they think that they can make a profit and trade here and I think that they will start looking at niche markets

Kenny: But isn’t it like the two pubs in the town, if the price of the pint is €5 in one it won’t be much different from €5 in the other. I am not accusing AIB and BoI of running a cartel, but when they are gouging on interest rates compared to the cost of funds,– one of them is not going to compete with the other

Noonan: Well they do compete. There are two issues. One is the availability of credit . We have to have credit in a growing economy. We have to have credit for mortgages so that young couples can buy houses. We have to have credit for SMEs. The second issue is the price of the credit. That is where interest rates come in. We are rebuilding an economy that was banjaxed. And we are rebuilding the banking industry. And of course I would like it to be more competitive

Kenny: But the dilemma for you is that the Central Bank can’t cap interest rates. It doesn’t have the power to do so. The government can. But the Government is a shareholder in these banks so it’s not in the government’s interest to do what it can for the punter which is to lower the interest rates.
Noonan: That is not the issue
Kenny: But isn’t it true that you have the power to cap interest rates?
Noonan: Governments have lots of different powers, but they can be challenged if you run contrary to the constitution. There are various things one could do. But the best thing is competition and if you can’t get straight line competition with new banks establishing here, you go to non-bank finance. If you look at the model in the US. 75% of the credit to run the economy in the US comes from sources other than the banks. And we are developing non-bank sources here as well.

Kenny: But if you take my point that you are a player on both sides of the match, you are trying to rebuild your bank and but also could control the interest rate

Noonan: I don’t think that that is a good idea and I am not sure of the legality is of that.
We have agreement with the banks that the government doesn’t interfere with commercial decisions. If we did it would be shades of Eastern Europe 25 years ago. We have to allow the banks to run by commercial standards. But I would predict that as the banks show more serious profits and they are seriously profitable now, their interest rates would become more competitive.
Kenny Given that you own virtually all of AIB, you could become quite mischievous in the marketplace when things improve – as the huge shareholder in AIB you could force BoI down couldn’t you?
Noonan: Not really – we need the two banks
Kenny: I mean by being extremely competitive in a state bank
Noonan BoI has a whole tranche of business on their books. AIB has as well. Both have very big farming interests. What we need is two strong banks competing. And other sources of revenue. Ulster Bank is of benefit to us. But the Credit Union is of big benefit as well and I would encourage outside banks to come in and lend and we are exploring and have had some success with non-bank sources of credit.







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"Because they(the banks) are rebuilding their balance sheets" said our Finance minister.

No mention of the thousands of Variable Rate mortgage holders who might be trying to rebuild their balance sheets.

Michael Noonan, knowing that we will not organise ourselves to take to the streets or such to force change, will continue the speil that competition will "make it better" And any interference by him might be challenged as unconstitutional.

As I've said before the citizen does not really matter to our Government.

Having this problem highlighted on AAM is encouraging.
 
That interview is infuriating. The following comment says it all...

We have agreement with the banks that the government doesn’t interfere with commercial decisions.

The government should intervene where commercial decisions are unfair particularly where the consumer has signed a contract where it has no power.
 
This is the bit I don't get

Noonan: We want to keep control of the banks. That we have influence over banking policy and not just through the Central Bank. That is why I am keeping 14% of Bank of Ireland and I have no intention of selling it. We need to influence policy…

and

Noonan: We have agreement with the banks that the government doesn’t interfere with commercial decisions. If we did it would be shades of Eastern Europe 25 years ago. We have to allow the banks to run by commercial standards.

These seem to me to be contradictory positions.

I would have thought that the government of the day should have strong views on general policy of using non-tracker mortgage holders to rebuild the balance sheets of the banks.

I fully appreciate that the Government should not interfere with a lending decision e.g. whether or not to give a particular individual a mortgage.
 
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