Introductory statement by Ed Sibley, Director of Credit Institutions Supervision, before the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach

08 December 2016 Speech

8 December 2016


Chairman, Committee members,

Thank you for the opportunity to appear before you today to discuss the Central Bank (Variable Rate Mortgages) Bill (‘the Bill’). The Governor of the Central Bank is at the Governing Council of the European Central Bank (ECB) today and sends his apologies in advance of his attendance before you on the 20 December.

As the potential effects of the Bill are relevant from consumer protection, financial stability and prudential supervision perspectives, I am joined today by the Central Bank’s Director of Consumer Protection and the Head of Financial Stability.

The Central Bank’s Mission of ‘Safeguarding Stability, Protecting Consumers’ is at the heart of all that we do. It encapsulates the dual and interdependent priorities for the Bank in delivering on its mandate.

Effective regulation and supervision driving well governed and well managed firms, which support economic growth and employment in Ireland, are outcomes which are in consumers’ long term interests. Similarly, the fair and equitable treatment of consumers is obviously fundamentally important in its own right but also in supporting the long-term viability of regulated firms and financial stability more generally.

The public debate surrounding Irish mortgage rates is understandable, as are the objectives of the Bill. A cursory comparison shows that some variable interest rates in Ireland remain amongst the highest in the euro area, despite recent reductions. However, the root causes of this are complex.

In my opening remarks today I will:

  1. discuss some of the main features of the Irish private dwelling home (PDH) mortgage market;
  2. outline how some of the associated issues are impacting mortgage pricing in Ireland and show that there has been significant progress in addressing these issues; and
  3.  summarise why the Bill may not achieve its stated aims and may have negative unintended consequences.

1. The Irish mortgage market

Mortgage arrears

The mortgage market in Ireland, like the wider housing market, is recovering, but it is still suffering the effects of the crisis that beset Ireland, and from the mortgage lending that took place in the period leading up to 2008.

Since the onset of the financial crisis, many mortgage holders have struggled to keep up with repayments. While the situation is improving, it is still acute, both at system level and also for individual borrowers in distress. The Central Bank has worked to ensure that the appropriate protections are in place for these borrowers who are in difficulty, and ensure that the banks have the financial and operational resources with which to resolve the problems.

At the end of June 2016, there were 740,834 PDH mortgage accounts in Ireland. Of these, 57,571 are in default (in other words, greater than 90 days past due on their payments) – of which 34,980 are greater than two years past due. 120,6141 PDH mortgage loans have been restructured due to repayment difficulties.

The Central Bank has utilised its legislative powers to protect consumers by imposing a number of codes of conduct and requirements on regulated firms, including the Consumer Protection Code, the Code of Conduct on Mortgage Arrears (CCMA) and the Minimum Competency Code. While the Central Bank does not have a statutory function to regulate mortgage rates, we continue to prioritise the protection of mortgage holders.

A central element of the CCMA is that arrangements to solve mortgage arrears must be sustainable and based on a full assessment of the individual circumstances of the borrower, and that repossession should be used only as a last resort. Under the CCMA, a regulated entity may only commence legal proceedings for repossession of a PDH where it has made ‘every reasonable effort’ to agree on an alternative repayment arrangement with the borrower and where other clear requirements are adhered to. The introduction of Mortgage Arrears Resolution Targets (MART) in 2013 drove a material change in the mix of restructures agreed, with a shift away from interest-only type arrangements to more sustainable solutions.

As a direct consequence of these actions, together with improvements in the Irish economy, mortgage arrears are reducing, while every effort is being made to keep mortgage holders who are struggling to meet their payment obligations in their homes. Mortgage arrears have fallen for 12 successive quarters and by 43 per cent from peak, with more than 120,000 mortgage holders having their loans restructured (although I would note that this is not necessarily a cheaper option).

Nonetheless, mortgage lending is evidently riskier in Ireland than other Eurozone countries. Furthermore, due to the economic and social policy choices that have been made, being able to effect the security that underpins the loan is more challenging in Ireland in the event of a default than in many other Eurozone countries.

To illustrate this point, between 2009 and June 2016, 6,214 PDH properties have been repossessed in Ireland, 66 per cent of which were either voluntarily surrendered or abandoned by the borrower. Approximately one in five mortgages are or have been in default; fewer than one in three hundred have lost possession of their houses through the courts.

Interest rates

The stock of mortgages in Ireland can be broadly divided into fixed rate mortgages and floating rate mortgages, and the latter category can in turn be divided into standard variable rate mortgages (SVRs) and tracker rates. More and more variable rate mortgages are priced according to loan to value, but for the moment I will stick with using SVR as a catch-all for non-tracker variable rate mortgages.

Currently, around 90 per cent of outstanding mortgage loans for primary dwellings are on floating rates – 50 per cent are SVRs2 with the remainder being trackers. Consequently, 90 per cent of PDH mortgage borrowers are exposed to interest rate risk, and vulnerable to interest rate rises.

Turning to mortgage interest rates themselves - the average interest rate across mortgage products in Ireland has fallen over recent years, and currently stands at 2.64 per cent. This is quite close to that of the weighted average in Eurozone countries at 2.553 per cent and is an exceptionally low level in historical terms for Irish borrowers, albeit that the average interest rate excluding tracker mortgages is 3.78 per cent, despite having declined in recent years.

But in the same way, as it is an oversimplification to refer only to one average interest rate for Irish mortgages, there are perils in oversimplifying our comparison with other Eurozone mortgage rates given the different characteristics of housing and mortgage markets in different Member States, including home ownership, the history of default and the balance between fixed and variable rate mortgages.

2. Factors impacting on variable rate mortgage pricing

In May 2015 the Central Bank published a paper on Influences on Standard Variable Mortgage Pricing in Ireland 4. This Paper set out the range of factors which affect the margin that banks charge on variable rate mortgages, including the cost of funds, the credit risk associated with the lending, operational costs of running a bank, the cost of capital and the market structure and the competitive environment faced by each bank.

Looking at credit risk, despite considerable recent progress, European Banking Authority (EBA) stress test data shows that Ireland’s mortgage default rate is more than 10 times higher than many other Eurozone and European Union countries. In other words, as I touched on earlier, mortgages are higher risk in Ireland than in the majority of those countries with which mortgage rates are compared.

Table 1: Euro area comparison of mortgage risk and interest rates

The EBA stress test data also shows banks operating in Ireland need to hold significantly more capital for Irish mortgages on average per euro of mortgage lending than other European banks, with associated higher costs, and hence mortgage rates.

The low level of repossessions I referred to earlier, creates uncertainty on the recoverability of collateral. Cross-country comparative research shows that increased recovery time is associated with lower availability of credit, and higher interest rates.5

A further determinant of bank lending margins, and hence pricing, is the degree of competition in the market. The crisis resulted in considerable structural changes to the Irish banking sector including increased concentration. We have seen some nascent signs of restoration in competition, with the reductions in variable rates, some increasing product differentiation, and potentially some small new entrants – but this is not of significant scale at this stage.

The ability and willingness of consumers to switch mortgage products is vital to ensure a well-functioning market. The level of switching of mortgages in Ireland is low. In this context, the additional transparency measures announced by the Central Bank in July, and which will come into effect from 1 February 2017, are aimed at increasing transparency and facilitating consumer choice. This has become more important as we have started to see greater differentiation in product offerings and mortgage pricing.

The vast majority of SVR borrowers in positive and negative equity could benefit from either switching to another provider or to another product with the same provider. Switching offers the dual benefits of potentially reducing monthly costs and/or the length of the mortgage, with potential savings of tens of thousands of euros. The more people who start to switch, the less the ability the banks will have to differentiate between new borrowers and existing.

The Central Bank is also examining what additional measures it can take to address any impediments to switching, notwithstanding that there is a material difference between switching current accounts or utility provider and entering into an arrangement involving lending a customer sizeable sums on a 20-plus year basis.

3. The Central Bank assessment of the proposed Bill

Turning to our assessment of the Bill, it is far from certain that the Bill will be successful in delivering its aims. We are concerned that the Bill focuses on the symptoms of a complex problem and may, therefore, not only be unsuccessful but runs the risk of being counter-productive, as it may have damaging side effects on the functioning of the market.

From both a financial stability and a consumer protection perspective, it is essential that banks have sustainable business models that take into account the risks that are inherent in their lending practices. There is a risk that capping interest rates will result in an under-pricing of credit risk, as was experienced in Ireland and internationally to such dangerous effect in the past.

Alternatively, were this legislation to be introduced, lenders may adapt their credit standards and offer variable mortgage loans only to new customers with a low risk profile – ultimately reducing credit availability. Lenders could also raise interest rates on other loans, and increase fees and commissions, in order to maintain or achieve sustainable capital generation.

It is important that banks have the ability to generate capital to transition towards full implementation of new regulatory capital requirements. Adequate capitalisation is essential for a properly functioning banking system and to ensure sufficient availability of credit for businesses and households, as well as to strengthen the resilience of banks to future shocks.

Additionally, the proposed legislation may have the entirely unintended effects of stifling competition and innovation and dissuade entry of new participants to the Irish market. International evidence indicates that competitive financing markets are important for the choice, quality and pricing of financial products, which are all in the interests of the consumer.

Furthermore, with regard to the interest rates charged on existing SVR mortgage loans, they are subject to existing contracts and contract law, which only a judge could override, not a public body like the Central Bank.

We are also concerned about the extension of the Bank’s statutory functions to encompass the regulation of competition, which is a function already carried out by the Competition and Consumer Protection Commission (CPCC).

Finally, we also note the ECB’s concerns raised in its opinion6 on the Bill, and the European Commission’s view, as articulated in the summary of the post-programme surveillance statement issued last week.

Concluding remarks

I appreciate that the positions I have outlined today are arguments against what might be perceived as a quick action to reduce SVR mortgage rates, which are low by historical standards, albeit higher than in countries with much lower default histories.

Material improvements have been recorded in many of the factors underlying mortgage rates in recent years, most notably lower household indebtedness, lower numbers in negative equity, lower numbers in arrears or default, improved resilience of the banking sector, and ultimately a gradual progression from impaired functioning to a banking system that can support economic growth, employment, and incomes. These improvements have coincided with some reductions in SVR rates. Further progress is expected in the coming years as the impact of the measures taken continue to feed through to the mortgage market and financial system and as the economic recovery continues.

The issues in the mortgage market are complex and rooted in the crisis, and clear economic and social policy choices have been made in managing the crisis and navigating a path out of it. Short term fixes may have long term negative consequences for consumers. Decisions to intervene legislatively in the mortgage market, as with any market, should be taken with due cognisance of the market, the factors that are leading to the perception of market failure, the underlying causes, and risks associated with the action and the likely outcomes.

Notwithstanding these concerns, as the Governor has previously stated, if these powers are conferred upon the Bank, we will do as we always do, and strive to deliver to the best of our abilities the duties and mandate that are given to us.

The Central Bank remains focused on delivery of its full mandate and is committed to working with all stakeholders to support the continued normalisation of the Irish mortgage market.

Thank you.

Notes to table 1

Columns 1-3 are based on December 2015 European Banking Authority stress test & ECB statistics

Columns 3- 6 are ECB statistical data

*Loss rate = credit provision to total mortgages.

**ECB data on new business mortgage rates are for euro area countries only.

1 Rate excluding tracker mortgages, Q3 2016.

2 Rate excluding renegotiations, Oct 2016.


1 The Central Bank has prepared a detailed analysis of the latest position of mortgage arrears which is with the Minister for Finance and we expect it to be released imminently. This shows that there continues to be significant progress in addressing mortgage arrears, albeit that the level still remains too high.

2 Includes up to 1 year fixed

3 The weighted average of all Euro area mortgage loans is 2.55%. The average of Euro area countries is 2.29%

4 Influences on SVR Pricing in Ireland, Central Bank of Ireland, May 2015

5 Research Technical Paper, The distribution of debt across Euro Area countries: The role of individual characteristics, institutions and credit conditions (

6 Opinion of the European Central Bank of 17 November 2016 on the conferral of powers on the Central Bank of Ireland to assess competition in the market for the mortgage loans and to issue lenders with directions on variable interest rates (CON/2016/54)