Last night’s Primetime had a well thought out piece on variable interest rates.
The general thesis was that variable rates are ‘too high’ and that banks should not be allowed to charge them, the figure of 1% of a ‘cost of funds’ was mentioned several times and various suggestions were made as to making the banks stop the practice of setting their own prices.
To begin with, the ‘cost of funds’ at 1% may be what a bank buys their raw materials at, but then you have to make more on top of it to allow for operational costs, to provide for losses, regulatory burdens, margin and the like. It is worth noting that in AIB’s interim statement which was only made yesterday that they noted that “Net Interest Margin (NIM), excluding ELG, expanded to c.1.64% year to date (YTD) September 2014”.
This means the idea of 4.5% minus the 1% ‘cost’ equating to a 3.5% ‘profit’ doesn’t stack up. If it did the net interest margin wouldn’t be less than half that amount.
Equally, the outrage at the cost of the banking bailout can’t be wedded to that of having low rates at the same time because any recouping of these costs is predicated on banking profits, and they make their money on the margin that is being decried.
Well known consumer advocate Brendan Burgess said he wondered why 300,000 people affected are not marching on the streets, I also wonder this, but wonder why they are not marching to a competitor to refinance and get a cheaper rate? The likes of KBC not only have the best rates but they’ll even put €1,000 towards the costs!
This would indicate that in part there is inertia, people are quick to complain but slow to act. Although there is also the other issue of people caught by negative equity who can’t refinance.
For a moment let us imagine that they could refinance, would the lender who is taking on that business – bearing in mind they are highly exposed from day one in terms of the underlying security – be likely to charge more or less? They’d want to charge an equivalent or higher price to allow for the risk so in some ways even if those in negative equity could refinance they’d be unlikely to get a better rate.
Another huge impact is that you can’t repossess in Ireland and one of the consequences of this is that you have to build in huge loss margins, something the banks have learned the hard way.
The wording in the loan contracts that rates change in line with ‘interest rates’ doesn’t mean we are talking about the ECB base rate which is one of many rates, they could argue it’s Euribor, cost of funds rates, deposit rates (which feed into total costs rates), blended rates and other ‘rates’ .
Equally, the proposition that the High Court ‘ruled in favour’ of the case mentioned is questionable, they didn’t make any ruling, they pushed it back on to the Financial Services Ombudsman, meaning they specifically didn’t make a decision. the High Court and their judges are well aware of their remit and scope of powers, so why take something that could be dealt with under contract law and lay it off?
If the case was so clear cut they wouldn’t have made a decision.