‘No evidence’ banks failing to pass on rate cuts, says ECB

There is no evidence that banks are not passing on interest rates cuts, the ECB has claimed in a research paper.

The ECB has slashed rates to 0pc in an attempt to stimulate lending, but Irish banks are still charging mortgage borrowers here in excess of 3pc.

However the report, which looks at the euro area as a whole, claims the market is functioning – with lower interest rates being passed through the banking system to borrowers.

“So far, there is no evidence that monetary policy transmission in the euro area is being significantly affected by this type of non-linearity (banks delaying passing on interest cuts),” according to an economic bulletin published by the ECB in Frankfurt yesterday.

That finding is likely to raise eyebrows here, where the persistently high cost of credit has prompted policymakers to table legislation to give the Central Bank powers to cap mortgage interest rates which is likely to be enacted by the summer.

That bill looks set to pass despite opposition from both the Central Bank, which says it doesn’t want new powers, and the Minister for Finance Michael Noonan.

The minister has said competition is the best way to bring down prices.

Variable mortgage interest rates here are around double those charged in the rest of the eurozone.

It means a typical Irish borrower pays €200 a month more than a homeowner in Germany or France on a €300,000 mortgage.

Fixed-term debt is a smaller part of the Irish market relative to other markets, but remains expensive by comparison.

Tracker mortgages give borrowers a legal right to interest rates tied to the official ECB rate.

They are by far the cheapest mortgages in Ireland, but have not been offered to new borrowers since the crash.
In its research, the ECB does not cite Irish borrowing costs, focusing mainly on the situation in four big eurozone economies – Germany, France, Italy and Spain.

The ECB found that, after a period of wide divergence during the crash, retail lending rates have declined across the Euro area since 2014.

The bank linked that trend to so called non-standard measures introduced to encourage more, and cheaper, lending – including slashing official interest rates to an historic low of zero.

The EU’s new common banking rules, including a single supervisor for large lenders and common standards, had also reduced fragmentation across the member states.

Where big gaps do exist between borrowing costs country to country, the Bank said it can be a reflection of more local factors – including cyclical issues within economies and structural factors.

The key determinate of price divergence between countries is banks’ own borrowing costs, the report said.

Retail interest rates reflect the cost to each bank of cash raised through the bond markets and savings, regardless of official interest rate action.

Big differences between headline borrowing costs from one country to another can also reflect factors such as higher fees in one market compared to the other, which are not captured by a direct comparison of interest rates, the report said, without citing specific evidence or cases.

Differences in “collateral and contractual options” can also explain price differences, the report said.

In the Irish case, that would include the relatively slow and borrower-friendly repossession processes in cases of default, and the high level of impaired loans held by banks, though again, the report does not cite such examples.

Borrowing rates can also diverge between countries as a result of the share of fixed versus variable rate loans issued by lenders.

Although in the Irish case, even where fixed rates are available, the pricing is multiple of those charged by banks in the rest of the eurozone, and also tend to be for shorter period.

The legislation now going through in Ireland, which would allow the Central Bank to set a cap on how much banks can charge mortgage customers, most likely with reference to official ECB rates and comparison with other markets, is opposed by the ECB.

Ahead of the legislation being debated ECB president Mario Draghi claimed the bill would damage the credibility of the Central Bank and the ECB.

Mr Draghi claimed new lenders would be less likely to enter this market if there is a mortgage rate cap in place.

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