Should banks pass on rate cuts?

Should banks pass on rate cuts?

Today’s topic may be a little contentious… In a surprise move yesterday Mario Draghi, the brand new ECB President, reduced interest rates and indications are that they may go lower again in the near future (he had been president for a mere 3 days to that point). The reduction was 0.25%, giving a new base rate of 1.25% (the same as it was back in the April-July 2011 period).

The question now is ‘Will banks pass on the rate cut?’ We are not talking about tracker mortgage holders who have that built into their contract, rather we are talking about Standard Variable Rate mortgage holders, all 250,000 of them.

If your instant response was ‘yes of course’ then think about some of these things first….

  • In paying for bailouts the best way to get a return on our investment is to allow banks to charge more, the other things banks can do is drop deposit rates (not happening because they are already under funded via direct deposits) or fire a lot of staff (also a very harsh solution). Allowing them to charge more means giving them a chance at getting healthy again.
  • The rates banks charge are totally disparate, look at AIB under charging (due to political pressure) customers with a rate of 3.34% – that is not a commercial rate, it’s a give-away. At the same time PTSB (who did a better job of avoiding state support) are charging 6.05%. They will pass on the rate cut, but even at that they will be almost 2.5% more expensive than AIB.
  • Why should a person get a rate cut if they didn’t sign up for a tracker? Their product doesn’t come with that guarantee. Isn’t that the whole point of making adult decisions? If we are to break terms and conditions on variable rates in their favour, then why not have moves against fixed rates or trackers – who are effectively beneficiaries of variable rate hikes, remaining protected while some bear the brunt?

We think this will be a thought provoking topic, and look forward to your comments!

Karl Deeter

You can find Karl on Twitter @KarlDeeter
their blog is at http://www.mortgagebrokers.ie
 

 Karl is the Operations and Compliance Manager at Irish Mortgage Brokers in Dublin  2, he is also a resident guest blogger here at MyHome.ie

There are 32 comments for this article
  1. Richard Barry at 10:31 am

    Karl, my point was the penal “insurance” rates being charged to fix mean you effectively are paying close to interest only for 1-5 years and will still have to face STV at some stage. Perhaps a more equitable solution that would short-circuit this fixation on the ECB rates is to allow longer fix-terms of 20-30 years as is done in the US and other countries. Fixing for the term or close to it would give the borrower and the bank security but Irish banks are uninterested due to low level of profitability.

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  3. BB at 2:59 pm

    Only on trackers as per contract. Otherwise they should price their loans to maximise their profits so that the taxpayer doesnt have to put any more money into them. If they overdo it theyll wipe their current customers out and lose new business to cheaper banks just as the invisible hand of the market wishes. Only a fool signs a contract where the amount to be repayed is not clear on signature. In the nineties interest rates on these loans went to 15-16%. Those who fail to learn from history are bound to relive it.

  4. suzy at 9:25 am

    Karl
    You miss the point about Ulster Bank. Their Irish losses are increasing , Ulster Bank levels of arrears are shooting up. They have pushed many of their customers over the tipping point and their approach to rates and margin is actually hurting them. If as they say they want to become a third force in Irish banking then it is in their interest to have a functioning economy. Ulster Bank arrogance undermines this. Not that they care about their public image but Ulster Banks reputation is increasingly in the gutter with a growing number of customers. Ulster Bank are effectively telling the Irish government to get lost and it appears that Fine Gael and Labour are as spineless as Fianna Fail!

  5. Frances Casey at 10:28 pm

    Is Karl D taking the proverbial piss of course they should pass it on.My SVR with ptsb is nothing short of extortionate my mortgage was taken out when trackers were available but I was never offered one .I have spent the last year trying to get an explanation from the bank to no avail. They can increase my rate whenever they please which they did this year already. It should be mandatory to reduce any ecb rate cut. I hope the financial regulator stand behind the statement he made recently about making sure the banks do this especially considering the amount of our money that has been pumped in to prop them up!!!

  6. totallypissedoff at 10:25 pm

    It’s a game with no winners. It makes no odds if they pass it on or not because they will take it back one way or another. Someone has to suffer. One lie after another, one excuse after another and pass the buck.
    We are living in a dishonest and corrupt society.
    Paddy with a few bob in the bank is a rare comodity, trust the banks at your peril!

    Its not about the people its all about the money.
    “Greed”

  7. Karl Deeter Author at 5:13 pm

    @tax slave – the banking crisis, mortgage crisis, and deficit crisis are all closely related but not all contingent (except to the degree that we have made it that way via the bank guarantee etc.). The short answer is that it is going to take a very long time.

    @Andy – usury is the foundation of the entire western financial system. I agree (and am a fan of islamic finance for that reason), but the solution suggested would end the present system overnight, disasterous.

    @Pauline: the vaults are in fact ALWAYS empty, that is a defining characteristic of fractional reserve banking, if you went in you’d find pieces of paper (assets) pledging the money (loans), those are bank assets, their liabilities (deposits) are all shunted away rapidly for the most part.

  8. Karl Deeter Author at 5:07 pm

    @Suzy Ulsterbank were guaranteed under the UK bank scheme, and the UK taxpayer wants as much back as they can – why are we different when looking at Irish banks? (not wanting maximum return on our investment in them?)

    @Richard Barry: Many of the rate increases came without any ECB movement at all, that is the downside of a ‘standard varible rate’, if a person doesn’t want this they could opt for a fixed rate – that 2-3% difference is effectively the ‘price of insurance’ for the fixed rate. So if you don’t want to pay that, given that you have no price promise then how can one be bothered if they get a rate increase given that they opted not to pay for the insurance that could protect them from it?

    @Paul: I think that the Dec 6th budget will quickly sap more goodwill than the ECB rate cut can create!

    @Septic Tank: I think that not paying unsecured bond holders of broken banks could be a good place to start!

    @Graham Geraghty: That kind of legislation is dangerous because it puts government fully in control of banks via the back door. That will also make selling the banks with any government share remaining in them impossible as nobody would want to buy into such an institution.

    @kate: it will be passed on to those who bought a price-promised product, and may not to all of those who didn’t. If the price of wheat drops every baker doesn’t drop their price, why would it be any different in banking unless the contract says they have to?

    @subhash: perfect observation – in fact the one thing I can’t understand is why there are not more mass layoffs at banks.

  9. Michael O Brien at 1:59 pm

    The idea of any bank deciding to hold off on this interest rate cut ,is further evidence of the ‘Banks ” arrogance.We have tried to convince ourselves that the banks are acting responsibly for twoo years now.We are told they are achieving their targets in terms of demand for borrowing by public.How would anybody in their right mind consider applying for a loan under these terms.If part of Eurozone and goverened by their terms ,Why cannot the Irish banks not adhere to the idea.We are trying to trade out of this recession ,but cannot without proper level of liquidity.This can only be achieved if Banks release their tight grip on credit.SME’s require capitol and its the banks role to offer this facility both Willingly and at the right price.Trying to improve their bottom line all the time, is unacceptable.

  10. Andrew at 12:57 pm

    We need a financial regulator who can regulate, the banks do not work upoun moral ground, and it takes more then the regulator breathing down the necks of the banks to ensure they pass on the savings to mortgage holders. PTSB raising their SVR 2.5% outside any ECB increases is a prime example of the banks taking the pi*s and it should be stopped

  11. Pauline at 12:46 pm

    Why are WE letting the banks hold US to ransome – THEY depend on US why can’t WE make demands on THEM and everybody with savings threaten to withdraw by a deadline to OUR demands, what would they do with an empty vault? guess they could all move in there when THEY lose THEIR jobs and houses.

  12. Andy at 12:41 pm

    The banks made the mistake of introducing tracker mortgages for no reason other than greed, chasing loans for a bigger market share.

    The STV has been in place as long as I can remember and it used to be a good system, they were a type of tracker mortgage, based on the inter bank lending rate.

    The cost of money to the banks has dropped to the lowest level with finance at a special rate around 1% from the ECB.

    If they need to trim their banking models to get back into profit then that is what they should do they are no different to any business model and they have never shown their customers any sympathy so why should the customer give them what they have never earned?

    There are plenty of opportunities for the banks to increase profits by getting back to lending, perhaps they still haven’t learned that the only reason they were rescued was to stabilise the economy, now they want to keep money out of the economy by refusing to pass on the rate cuts.

    If need be they should be regulated further and only allowed to charge a set % above the cost of money for their different products, competition being what it is in theory they could be allowed to charge less or pay depositers more but cut out the usuary.

  13. Tax slave in private sector at 12:13 pm

    @ Karl, not sure how this mortgage crisis will be resolved by increasing interest rates to anyone. I don’t see how forcing people to pay back so much that they are left with no disposable income is sustainable long term when people are in negative equity and the developers/bankers/regulators are let off the hook.

  14. Subhash at 11:31 am

    The banks in this country never do anything until they are forced to.
    Even then they find ways of getting their own back when your head is turned.
    I presume thats kinda OK, if they weren’t basically dishonest, they would need more of the public purse to pay their overpriced and somewhat under-performing higher management.
    A very high price to pay for high level mismanagement of out resources and money.
    Of course the banks will insist that the country cannot do without them. Our politicians believe that mantra, and we the people pay almost without a say in the matter.

  15. kate at 11:22 am

    Whats the point in having lower rates unless its passed on to the customers. People forget the interest rates banks charged in the past. They are always looked after the Bank , not the customer they forget that its the customer that pays their Fat Salaries.

  16. Graham Geraghty at 11:21 am

    good article Karl,legislation should be brought in to insist all banks pass on Ecb cuts,and the banks that dont, should be highlighted and punished,people should take any accounts away that they have with banks that dont pass it on!

  17. Septic Tank at 10:59 am

    A difficult decision. I feel very angry at the banks for landing us in this mess in the first place and don’t feel inclined to help them in any way, but we have a huge bailout to pay for.
    Perhaps we should try for the same deal that Greece got and then the banks could afford to pass the rate cut down to us.

  18. Bernie at 10:36 am

    I fully agree with the comment made by Eoin (No. 3 above). If the interest rate was reduced, people would have more disposable income and this would certainly benefit the economy.

  19. Paul at 10:20 am

    Of course they should pass on the rate cut, we bailed them out. It would also create some good will between people with mortgages and the banks especially before Christmas when every cent counts.

  20. Richard Barry at 10:15 am

    I absolutely disagree with Karl’s basis of “if you wanted cuts to be passed on you should have got a tracker” arguement. Personally when I had finally saved enough to get a mortgage last year a tracker was long off the table. Bank’s make fixed unappealing by charging over the top rates to fix (can by 2-3% above variable) so STV is the ONLY option. It’s a two-way street, we have to pay when there are increases we should benefit when there is a reduction.

  21. suzy at 10:10 am

    Of course
    look at Ulster Bank – highest rate of arrears- bigger losses – greater level of impairment – what do the muppets do? – push their customers into greater debt!!!
    and the cycle continues.
    They are leeches

  22. karl deeter at 10:09 am

    @Fergus Henry: We already have given the banks everything! 🙂

    @Paddy few bob: That is the conundrum, banks only have three basic tools for increasing profitability 1) fire a lot of staff [in bank-speak its called ‘gaining operational efficiency], 2) increasing borrowing rates 3) cutting savings rates

    @eoin: I don’t know if it is that liear – because people who do have any money seem to be putting it away, our savings rate is paritcularly high. Meaning the additional disposable income may not automatically turn into savings.

    @Tax Slave: Would a better response in your opinion be to let the trackers take a bit of a hit and give them a rate hike? (it’s uncontractual and won’t happen but if it could would that be a preferred response?)

    @Aidan McAdam: people tend to borrow long term but think short term, we have always found that advice for longer term fixed rates goes unheeded – even in the late 09′ early 10’ period when you could fix for 10yrs at just over 4%! Even in the USA where people take out 30 year fixed rates they generally refinance within 5 years or have to move/redeem etc, so the changing cost of money doesn’t guarantee a better outcome from what I can see.

    @Katie: precisely, the critical point is the crossover between morality (pass on the rate cut) and profitability (because we paid a lot of our future earnings in to banks that won’t go into hospitals/schools etc and should therefore get the best return we can).

    @Slave to mortgage: They gave rate hikes even when the ECB was doing nothing! PTsb (for instance) went from low 3% region to > 5.5%! (ECB hikes took them over 6%). So they are passing on the rate cut but AIB customers – if they don’t get the rate cut – are still on a far better deal! I think the idea of passing it on is good, but the ‘our taxes’ argument has a flaw – the taxes of those who have no loans, who have trackers and who are renting out properties are also supporting the banks… This group of people have a valid argument in wanting the banks to make profit, become strong again, lend regularly and get to a point where we can sell them on for some €€ in the future, how do you balance the two?

  23. Alec at 10:01 am

    Plane and simple yes the banks should pass on reductions in interest rates just as they up the rates before the ecb has done. We are paying for the banks so why should people not gane from the cuts they receive. Just shows how corrupt this Country has become but its just a legal form of corruption because a corrupt government made the loop holes for them to get away with it. Same as Petrol, the garages are quick enough to up the price as their prices go up but arent so wuick to lower them when their expenses drop.

  24. Home Thoughts at 9:59 am

    It should be a commercial decision. Bank funding costs are still relatively high because of system stresses. Passing on a rate cut to everyone is not necessarily a way of relieving the stress for those in most difficulty because of income reduction etc. Nevertheless banks do have an interest in targeted stimulation of the economy so should try to benefit some customers at least.

  25. Slave to my mortgage – Negative Equity Home at 9:50 am

    They should absolutely pass on the cut after all it is our taxes that are keeping the banks afloat. They are quick enough to hike up interest rates when there is an increase in the ECB interest rate, they should do the same when the rates come down. Are they really going to continue to take us for mugs!!!

  26. Katie at 9:38 am

    The ECB are cutting rates to try to boost the economy in the Eurozone by encouraging people to spend. How are people supposed to spend when the banks refuse to pass on the cut and therefore people are left with no disposable income. The banks are having it every way, they are able to borrow from the ECB for less because of the cut but they are not giving their customers the same opportunity. Variable rate mortgage holders are being penalised for the banks mismanagement of their own affairs over the last number of years.

  27. Neville mc carthy at 9:36 am

    Yes the bank should pass on the decrease to the variable rate,they are quick enough to put it up when an increase is announced,it works both ways.at the end of the day the banks wouldn’t be able to open there doors if people didn’t have there money lodged with them so they should have respect for there customers especially during these very difficult times or they might find themselves with more worthless properties on there hands than they Know what to do with !!!

  28. Aidan McAdam O Connell at 9:35 am

    The historical concept of variable interest rate loans is deeply flawed. The Irish customer base is coralled into a system which uses as its default position a, “we’ll give you money and tell you later what it costs” loan. Karl posits the question about adult decisions but a decision implies a choice, a choice most customers looking for a morgatge simply do not have. I believe that banking regulation needs to consider this area, contracts should be more rigourous, putting restrictions on both parties. A clear repayment schedule in all morgatge products would clearly benefit customers but would also promote more considered lending in boom times.
    We wouldn’t borrow from a money-lender on the basis that he’ll let us know the cost… so we shouldn’t accept banks actin gin this way.

  29. Tax slave in private sector at 9:29 am

    To keep penalising those on a SVR mortgage to prop up the tracker mortgages will result in even more mortgage defaults which will be worse for banks.

    The people trying to pay back mortgages should not be penalised for the bad decisions made by banks in terms of volume and amount of overall loan books.

    Right now paying back a mortgage feels like throwing good money after bad.

  30. eoin at 9:27 am

    Rate cut = more disposal income = more consumer spending = more jobs = less unemployment = less taxes = economic growth

  31. Paddy, with a few bob in the bank at 9:08 am

    The banks can charge whatever interest they like on loans once they do not cut the rate I get on my savings.

  32. Fergus Henry at 9:07 am

    No they should not, we should take pity on them and give them every cent we posess.