The Central Bank is officially aware of the PTSB SVR problem

Brendan Burgess

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The Central Bank published this today

[broken link removed]

Jean Goggin, Sarah Holton, Jane Kelly, Reamonn Lydon and Kieran McQuinn

The paper is short and well worth reading to get the full context of these comments.

Introduction

This Letter examines movements in the interest rates charged on variable rate mortgages. The results indicate that variable rates for all lenders closely followed changes in the ECB's policy rate, short-term wholesale rates and tracker rate mortgages until the end of 2008. Thereafter, the relationship breaks down, in part due to banks' increased market funding costs. It appears that some lenders with higher mortgage arrears rates and a greater proportion of tracker rate loans on their books exhibit higher variable rates.

This Letter aims to answer two questions:

...

Why have some lenders increased variable rates more than others?

....

When one part of a lender's book is unpro fitable, banks may increase rates on other loans to compensate.

...

The range between variable and tracker rates varies between 1.4 to 2.8 per cent, indicating that some lenders have increased variable rates
more than others.



4.2 Analysis of variable rates for five lenders

We analyse the rate-setting behaviour of five lenders between 2003 and 2011: Allied Irish Banks, Bank of Ireland, Educational Building Society, Per-
manent tsb and ICS Building Society.

For the period from 2009 onwards, the key results are as follows:

• It appears that some lenders are charging higher variables rates to compensate for the losses they are making on their tracker loans.

• One bank's (A) variable rates are signi ficantly lower and another bank's (F) variable rates are signi cantly higher than its peers, controlling for funding costs, arrears rates and other factors.

Conclusion

The second result from our analysis is that it appears that some lenders are charging higher variables rates to compensate for the losses they are making on their tracker loans, controlling for our estimates of funding costs. A risk with such a strategy is that it may be counterproductive and continue to exert upward pressure on arrears.
 
Very interesting synopsis on the whole rate and margin issue.

Apparently they looked at the five main lenders for the period since 2009,

Key statements

  • One bank's (A) variable rates are signicantly lower and another bank's (F) variable rates are signicantly higher than its peers, controlling for funding costs, arrears rates and other factors.

  • It appears that some lenders are charging higher variables rates to compensate for the losses they are making on their tracker loans.

    ​
No need to say anything other than F has to be PTSB.

Table 1 is interesting and my take on it is below.


  • Owner occupiers rate varies from 3.5% to 5.4% a difference of 1.9%.
I persume that PTSB rates before this were higher in the month before this at approx 6.1%? So perhaps they wind of this report being done and did not want to be caught too far offside and reduced the rate.



  • Buy-to-let mortgage holders are seriously shafted, rate varies from 3.5% to 6.4%, a difference of 2.9%. That is almost double the cheapest rate!
It begs the question, if trackers are moved to a bad bank will the SVR rates come down and with that will lending start again.

Conversely, those with trackers in the bad bank are stuck with them if they want their low tracker rate. If they trade up or are forced to sell, they lose their tracker and move onto an SVR.
 
I have just read the research paper behind this press release and it really is fascinating. I posted the press release at the time and gave it no further thought.

Am I being naive or too optimistic - is the Central Bank setting up the PTSB for being morally suaded to reduce their rates in line with their cost of funds?
 
Saturdays newspaper. This PTSB issue effects me and I'm very annoyed about it.
It sickens me the way my SVR rate is at least 1.5% to 2% above the other banks and PTSB is state owned. The long term repayment effect is huge and the monthly repayments are hundreds higher.

I'm not permitted to post the link but check Saturday's (18th Feb) Irish Independent using google (search under "central bank puts pressure")
 
Surely an "independant" business is just that - they are allowed to pursue a profit (or loss) as they wish. If they are not "independant" as for example PTSB and are seemingly supposed to to be in the business of pursuing some social good then surely their owners (ie the State) can dictate how they run their business - although this is probably against EU rules.

I find all this this wishy washy "put pressure on", etc is rather annoying and fruitless. If we want to run the PTSB as an arm of the Dept of Social Welfare (or whatever it is called these days) then let's do it otherwise stop bemoaning the fact that the directors are trying to turn a profit.
 

In case you have forgotten Ireland is in recession and the domestic economy is in decline - this is not the time to be raising interest rates. A state owned bank shouldn't be allowed to over inflate it's rates given the increasing number of loan defaults and people in arrears, never mind people's inability to spend their wages in the irish domestic economy. The ECB is cuttimg interest rates because we are in recession, it is only right and proper PTSB follow suit and get their rates in line.
 
[broken link removed]is reporting that the Bank of Ireland has been told by the government not to pay 6 weeks' redundancy to its employees.


So how come the government can get involved in this bank where it only owns 15% of the shares but has to treat the PTSB at arms' length where it owns 99.x% of the shares?
 
Hi,

I got an email reply direct from Matthew Elderfield in the Central Bank as follows:

"Dear Mr xxx (thats me, private)
Thank you for your email regarding your concerns about the standard variable residential mortgage interest rate charged by Permanent TSB. Since 2009 several factors have contributed to increases in standard variable mortgage interest rates in the market, including the curtailed access for Irish banks to wholesale market funding. While the cost of funding has increased for all our banks some have had to pay more for funding than others – this can also be seen in the variation in deposit rates offered by different banks. This variation in the cost of funding partly explains differences between the SVRs banks charge. However, while historically bank SVRs have generally tracked their cost of funding, we are aware that the banks appear to have increased at different times and to different degrees the spreads by which their standard variable rate exceed their cost of funds. We have used and will continue to use suasion as well as our existing powers to encourage the lenders whose standard variable mortgage rates appear to be disproportionate to their costs of funds to reduce their rates. We have had some success in this regard and indeed PTSB has made some recent reductions. I would like to assure you that we are continuing to engage with lenders on these issues.

Regards Matthew"
 
Thanks bmount

They keep saying that they are using powers of suasion in everything article/piece I've seen..hopefully a drop will come into effect in the coming months
 
That's a positive reply bmount - better than the reponse I received in early January from his office.

Angela59
 
angela59 said:
That's a positive reply bmount - better than the reponse I received in early January from his office.

Angela59
Click to expand...

Yes, the language seems to be getting a bit more optimistic.

We have had some success in this regard and indeed PTSB has made some recent reductions. I would like to assure you that we are continuing to engage with lenders on these issues.
Click to expand...

This sounds to me as if he is saying " they reduced the rates, but we are not happy with the extent of the reduction"
 
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