State would be lucky to sell shares in our cash-strapped banks

THOSE of you fortunate enough to have savings in the bank will know that the interest rate being offered to you is near enough to being nonexistent.

Those of you who have mortgages will know that you are still paying more in interest than you should be, at least by comparison with the interest rates being charged for home loans in most of the rest of the European Union.

You may also have observed that while the Irish banks are profitable, they are not paying any corporation tax to the Exchequer.

There would seem to be some obvious and quick fixes, especially as the Government owns the majority of the shares in AIB, EBS and Permanent TSB, and a 15% share in Bank of Ireland.

Tell them to increase the rate paid to savers, reduce the rates charged on loans and change the tax laws to make sure those massive losses they made in the past can’t be offset against presentmortgages day profits to avoid a tax bill.

Except none of it is that easy to do, no matter what some political parties, especially Sinn Féin, will tell you.

The banks are victims of the low interest rate policy set by the European Central Bank, so unfortunately, they say with some legitimacy, they can’t afford to pay more interest on anyone’s deposits.

Trouble

They are on less solid ground when it comes to overcharging for mortgages – many of you may be paying variable rates of over 4%.

Some of the banks are offering new customers much cheaper fixed mortgages – but you may have to go to the trouble and expense of moving banks to avail of these. And even then you might end up paying more than you would elsewhere in the EU.

The banks are charging you these higher rates because they can – the domestic regulators are not moving in to stop overcharging and foreign banks aren’t interested in coming into Ireland to offer cheaper loans. European interest rates may be lower because the laws in other countries are far less tolerant of those who miss repayments; seizure of homes and evictions are far more commonplace.

But why isn’t our regulator helping out? Sinn Féin has promised that, in government, it would ‘reduce mortgage interest rates by introducing our Bill which would cause the Central Bank to instruct banks to lower the rates’. However, the Central Bank doesn’t want to do that, even if it doesn’t seem fair that existing borrowers are effectively being overcharged to allow the banks to rebuild their value (as recorded on their balance sheets).

Apparently that is the lesser of two evils. The Central Bank believes that if the banks have to cap interest rates, they will likely reduce lending further because they wouldn’t be able to make the profits they need. It would contribute to a vicious circle for the banks, destroying a large part of their remaining value (which is important to us as the State owns a large chunk of them).

In addition, the Central Bank believes that repairing the banks would become a lot more difficult if Sinn Féin was to succeed in banning the sale of distressed (ones where people aren’t paying their way) to investors who would chase down the debts for repayment instead.

Perhaps under pressure from its bosses at the European Central Bank, our Central Bank believes the stability of the financial system needs the sale of these bad loans by the banks, even if the buyers are the reviled vulture funds.

The main Irish banks are already in some trouble without making things worse. Profits are falling as it is, and to deal with this, they will have to cut costs further, which could mean thousands of job losses and more unpopular branch closures. They may also seek to increase the charges for offering services, in a desperate move to boost income.

Lucrative

The banks have been too short of cash to make the necessary investment in technology to be able to offer the banking services digitally in the way the majority of customers now want them. Competitors such as Revolut and N26, who have minimal costs by comparison, have been able to cherry-pick the most lucrative sections of the banking business from younger customers.

The State should be looking to offload this commercial burden as soon as possible, but there may be few buyers for the shares.

It gets worse for the State. Next week AIB is expected to announce the dividend it will pay the Exchequer from its 2019 profits will be just €110million, compared with €330million in 2018, because its profits are falling. But things could get even worse again. Increase the taxes on the banks and there will be even fewer dividends to distribute – and the value of the shares to sell will fall further, too.

None of which promises to be good for us, the Irish people, as owners, or as customers either.