Draghi does his home­work be­fore com­ing to Dublin

The Irish Times - - Business Today - Joe Bren­nan

Eu­ro­pean Cen­tral Bank pres­i­dent Mario Draghi did his home­work be­fore he be­came, on Thurs­day, the first sit­ting head of the or­gan­i­sa­tion to ap­pear be­fore the Oireach­tas fi­nance com­mit­tee.

It’s a pity some of the TDs and Sen­a­tors ask­ing the ques­tions didn’t do theirs.

The wily Ital­ian was pre­pared for crit­i­cism that the ECB bul­lied the State by not al­low­ing it to im­pose losses on bank bond in­vestors dur­ing the fi­nan­cial cri­sis, and that it ef­fec­tively bounced the then gov­ern­ment into an in­ter­na­tional bailout in 2010.

He re­torted that the ECB’s emer­gency fund­ing for Ir­ish lenders, equiv­a­lent to the size of the econ­omy at one stage, was “un­prece­dented” – and that he saw Thurs­day’s con­ver­sa­tion as an “op­por­tu­nity to mend a re­la­tion­ship that has been fraught”.

When asked about the state of the Ir­ish hous­ing mar­ket, Draghi said his “un­der­stand­ing” was that “con­straints to sup­ply” of homes is fu­elling con­struc­tion growth again, which should ul­ti­mately de­liver “less price pres­sure on hous­ing”.

And so, the ECB pres­i­dent of eight years also had a ready re­ply when com­mit­tee mem­bers asked him why the av­er­age stan­dard vari­able home loan in the State – at 3.08 per cent for a new loan in Septem­ber, com­pared to 1.76 per cent across the wider euro area – is so high.

‘Quasi-monopoly’

It was largely down to the fact the State has a “quasi-monopoly” bank­ing mar­ket that is “not com­pet­i­tive”, he said. AIB and Bank of Ire­land now con­trol about 60 per cent of the Repub­lic’s mort­gage mar­ket, not helped by the re­treat of boom-time for­eign-owned banks like Bank of Scot­land and Danske Bank dur­ing the cri­sis.

“If the Gov­ern­ment can take ac­tion to re­duce the de­gree [of] the pres­ence of a monopoly, that would be wel­come,” Mr Draghi said.

There was lit­tle ev­i­dence that, in ad­vance of Draghi’s ap­pear­ance, mem­bers of the com­mit­tee both­ered to re­view his crit­i­cal as­sess­ment of some of the pro­pos­als put for­ward by com­mit­tee mem­bers dur­ing the cur­rent Oireach­tas, os­ten­si­bly aimed at help­ing hard-pressed Ir­ish mort­gage hold­ers.

Like Draghi’s re­sponse in late 2016 to a re­quest from then taoiseach Enda Kenny and the Oireach­tas fi­nance com­mit­tee chair­man John McGuin­ness for an opin­ion on Op­po­si­tion pro­pos­als to give the Cen­tral Bank pow­ers to limit vari­able mort­gage rates.

Op­po­si­tion Bills

Mr Draghi penned a 15-page let­ter at the time, warn­ing that the mea­sure “could po­ten­tially ren­der the mar­ket less at­trac­tive and dis­cour­age new en­trants”.

“This would lead, in­stead, to lower com­pe­ti­tion in fi­nan­cial ser­vices in Ire­land, ef­fec­tively de­feat­ing the pur­pose of the draft law,” he said, adding that the plan may also force banks to push up the costs of other types of loans.

An­other Op­po­si­tion Bill – this time to reg­u­late so-called vul­ture funds that have been buy­ing up dis­tressed Ir­ish loans since the cri­sis – re­ceived a cau­tious re­sponse from Mr Draghi, when the Gov­ern­ment and Oireach­tas fi­nance com­mit­tee sought his views ear­lier this year.

The ECB pres­i­dent wrote in June that his or­gan­i­sa­tion is a “strong pro­po­nent” for the de­vel­op­ment of a mar­ket where non-per­form­ing loans can be traded.

He added that if the pro­posed laws put off po­ten­tial buy­ers of Ir­ish loans, it would “in­crease pres­sure” on banks to “ad­just their own strat­egy” for man­ag­ing dis­tressed loans and “de­ter­min­ing in­ter­est rates, which may not ul­ti­mately ben­e­fit bor­row­ers”. (The Ir­ish Cen­tral Bank has con­sis­tently ar­gued that bor­row­ers’ ex­ist­ing rights travel with them when their loans are sold on, and that laws en­acted in 2015 reg­u­lat­ing firms that man­age loans on a day-to-day ba­sis on be­half of vul­ture funds of­fered suf­fi­cient ad­di­tional pro­tec­tions.)

Bank prof­its

AIB and Bank of Ire­land, both bailed out dur­ing the cri­sis, are fore­cast by an­a­lysts to post a com­bined ¤1.8 bil­lion of net prof­its this year, marginally higher than what they earned in 2017.

Th­ese are, of course, galling fig­ures to stom­ach for any mort­gage holder high rates – or who has wit­nessed the be­hav­iour of banks dur­ing the ¤1 bil­lion tracker mort­gage scan­dal.

And while some non-bank lenders such as Dilosk and Fi­nance Ire­land have set their sights on mort­gage lend­ing in re­cent times, there are no signs of ma­jor over­seas lenders beat­ing a track here to in­ject real com­pe­ti­tion.

The Ir­ish mar­ket is not of­fer­ing over-the-odds re­turns to lure new en­trants. The purest mea­sure of Ir­ish banks’ prof­itabil­ity – their

The wily Ital­ian was pre­pared for crit­i­cism that the ECB bul­lied the State by not al­low­ing it to im­pose losses on bank bond in­vestors dur­ing the fi­nan­cial cri­sis

re­turn on eq­uity, or net as­sets of their busi­ness – is broadly in line with the Eu­ro­pean av­er­age.

It cur­rently stands at 7.2 per cent for Bank of Ire­land and 8 per cent for AIB, com­pared to the EU av­er­age of 7.5 per cent, ac­cord­ing to Bloomberg data.

One of the big­gest turnoffs for any bank look­ing at the Ir­ish mar­ket, ac­cord­ing to Davy an­a­lyst Diar­maid Sheri­dan, is the fact that it is dif­fi­cult for lenders to get hold of a home with the bor­rower is in de­fault.

Then there is the small size of the mar­ket, where less mort­gage busi­ness is writ­ten in a year than in a month in the UK; and the fact that banks in most other coun­tries make tidy sums charg­ing set-up fees for new loans, whereas some banks here are of­fer­ing 2 per cent cash­back in­cen­tives, he says.

Ir­ish banks, due to the scale of the crash and fact that they con­tinue to hold high lev­els of non-per­form­ing loans, are be­ing forced by reg­u­la­tors to hold con­sid­er­ably higher lev­els of ex­pen­sive cap­i­tal for mort­gage lend­ing than many of the Eu­ro­pean peers.

New en­trants would face the same hur­dle.

Ir­ish au­thor­i­ties de­cided that whole­sale re­pos­ses­sions would not be tol­er­ated even as bor­row­ers de­faulted in their tens of thou­sands dur­ing the cri­sis.

It main­tained a level of so­cial co­he­sion that has, ar­guably, helped the re­cov­ery. But higher mort­gage rates are one of the costs.

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