Finance Committee – Overview of Banking Sector: Central Bank 26.11.14

Overview of Banking Sector: Central Bank (Continued)

Wednesday, 26 November 2014

Joint Committee on Finance, Public Expenditure and Reform Debate

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Professor Patrick Honohan: I have no difficulty with them coming and I will pass on any messages which this or any other committee wants to send. I will do that and express my view on the reception they will receive. I will do anything members want but it will have no effect. I like to spend my time doing things which have an effect.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne Would there not be a vote of the governing council as to whether they should attend?

Professor Patrick Honohan: If there is, then I will vote in favour of them coming. However, I am only one out of a total of 24 members.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne Will Professor Honohan table a motion before the governing council or do whatever is necessary to start the ball rolling?

Deputy Peter Mathews: Information on Peter Mathews Zoom on Peter Mathews Perhaps we should go to the ECB in Frankfurt. We could send a strong delegation.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne Yes, perhaps we should. There was a great deal going on at that time. Professor Honohan—–

Deputy Peter Mathews: Information on Peter Mathews Zoom on Peter Mathews Now you are talking.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne —–telephoned “Morning Ireland” on the morning in question from Frankfurt. He was over there, as part of his role, representing the country. However, he had another role and a separate commitment to the European Central Bank. On the day following the “Morning Ireland” interview, it was widely perceived that we had entered a bailout and that everything was sorted. We were grateful to the Governor, Professor Honohan, for clarifying matters which had been the subject of huge confusion that week. I accept that there was major confusion and that there were mixed messages coming from political sources. On the following day, the then President of the European Central Bank in Frankfurt saw fit to issue a letter to the then Government threatening that there would be no further ELA money for the banks if the country did not enter a bailout. This was notwithstanding the fact that the ECB had just provided more ELA money in the aftermath of Professor Honohan’s “Morning Ireland” interview. We want to discover what happened, who was acting on behalf of whom, whether there was a bailout in place and why Ireland was threatened on the Friday after Professor Honohan had indicated that there was a bailout.

Professor Patrick Honohan: I will give a full account of everything I know about that matter, which is a great deal.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne Professor Honohan has said a number of different things. He first stated that his colleagues were not minded to attend the inquiry. Then he stated that he did not really know the position. How does he know that they are not minded to attend? Have they informed him that they are not going to come to Dublin and that he can forget about it? Has a discussion—–

Professor Patrick Honohan: More or less like that.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne More or less like that.

Professor Patrick Honohan: Yes.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne They stated that they could not be bothered coming to the inquiry.

Professor Patrick Honohan: I did not say that they could not be bothered.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne They are not minded to come. I would certainly urge Professor Honohan to approach his colleagues and ask them to attend. We want to know what happened. Apart from our own problems, we seem to have been part of a geopolitical event.

Professor Patrick Honohan: If I felt there were any secrets that were going to be covered up, then I would be in a different space. Everything is going to be completely open and I—–

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne I have no doubt that we will find out everything possible from the Professor Honohan and the Central Bank of Ireland. The committee has powers to obtain the necessary information. However, I am concerned about the European Central Bank – Professor Honohan is a member of its governing council – and what it was doing at the time of the bailout. Is Professor Honohan not of the view that he should go to Frankfurt and act as an advocate on behalf of the people of Ireland who want answers? Should he not say to his colleagues on the governing council that they must attend?

Professor Patrick Honohan: I know the answers and I will provide them. If I—–

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne Professor Honohan said there were no discussions—–

Professor Patrick Honohan: —–thought they had any influence in respect of this matter, I would ask them to attend. However, I am not going to state that I will go to Frankfurt and oblige them to attend the inquiry because that is not going to happen.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne Why was it necessary for Professor Honohan to go on “Morning Ireland” on the day before Trichet threatened us with the removal of funding?

Professor Patrick Honohan: One could put it the other way around and ask why he felt it necessary to write a letter after that. My appearance on “Morning Ireland” had nothing to do with Mr. Trichet.

Senator Thomas Byrne: Information on Thomas Byrne Zoom on Thomas Byrne However, Professor Honohan was in Frankfurt.

Professor Patrick Honohan: I was but I was not doing it at anyone’s behest. I was acting on the basis of my own judgment and in light of my responsibilities.

Deputy Tom Barry: Information on Tom Barry Zoom on Tom Barry I welcome the Governor. It was interesting to hear him state that houses might still be overvalued. In 1991, a three bedroom house could be purchased for €38,000. The cost of that house then ballooned to €280,000 before subsequently dropping again. One is obliged to wonder what is the real value of such a property. When discussing affordable housing, we must not lose sight of the importance of amenities, etc. One of the mistakes made in the past was that housing was constructed but no amenities were put in place. There is a two-tier system in place at present. Dublin has many issues when it comes to housing but the dynamic in respect of the remainder of the country does not reflect this at all. I am in the unenviable position of being a landlord. In the past it was possible to charge €1,000 rent for an apartment in Cork. The figure dropped to €750 but has risen again, although only to €890 or €900. Rents have not returned to previous levels at all because demand is only okay – it is not accelerating.

I put it to Professor Honohan that many investors who bought into the rental market when it was at its height now want out. They cannot get out, however, because if they sell, they will immediately crystallise their negative equity. Many of these people became involved in the sector because their businesses were successful and they used their disposable income to invest. Apartments in Cork which previously would have cost €320,000 are selling now for €130,000. That is a massive reduction. In nearby counties, houses which previously would have sold for €200,000 now cost €100,000. The people who bought properties are making a loss of €7,000 on them each year. That is going to be the case for the next 15 years at least until these properties are washed out of the system. I have heard all the arguments put forward and I agree with some of them. Creating employment in rural areas would certainly help because people would be brought to places in which there is existing and affordable housing. However, using a one-size-fits-all solution for Dublin and the remainder of the country is not the way to go. People must recognise that two different dynamics are at play.

Legacy debt remains an issue. Many SMEs that would have become involved in the area of property remain saddled with their investments. I commend the banks because they have the expertise to deal with this matter and they have finally begun to examine it. Previously, they had stood apart from any involvement. Many businesses are under pressure as a result of bad investments and they have difficulties with regard to arrears. The split-mortgage proposal put forward in the Keane report could have been pursued more vigorously in the context of the SME sector in order to resolve the problem of overhanging debt. I am aware of people who obtained 20-year mortgages in dubious circumstances. Expecting these individuals to remain healthy and wealthy up to the age of 70 was always going to be a big ask. Interest rates remaining low has been a saving grace. When we obtained our mortgage in 1997, the rate which applied was 7.7% and we were delighted with that. I have heard people criticising mortgage interest rates of 4%. If one cannot afford to pay that rate of interest, then one should not be getting a mortgage. In historical terms, 4% is a low interest rate. However, Professor Honohan may disagree. As already stated, the pillar banks have come a long way in terms of dealing with this matter.

Is Professor Honohan of the opinion that there is a need to establish a commercial bank – in the past we had the ICI – to deal with SMEs? Such a bank would have the expertise to assist SMEs with their legacy debt and their links to the property market and could provide them with finance into the future.

Professor Patrick Honohan: The Deputy made a number of points. On the geographical split, it is true that the Dublin area has experienced a big upturn in prices. There has also been an upturn in some of the other larger urban areas but to a much more limited extent. As far as our information is concerned, the number of high loan-to-value and loan-to-income mortgages outside the Dublin area is extremely small. People might ask why we are not just introducing what is proposed in respect of the Dublin area. Actually, it seems as if it will have little to no effect outside Dublin. This is presumably because property prices are lower and because the people who want to buy will be able to raise the higher percentage required in terms of their deposits and so forth.

I do not know that I can give much comfort in respect of the prospect of prices returning to where they were at the peak. The peak is the unusual aspect. In the context of where we are now, we have no evidence that prices are out of line. In other words, that they are either too high or too low. Nobody has a very precise indication in that regard. Previously, we would have had an indication. During the boom, for example, we would have stated “It is too high but we are not sure by how much”. Now it is in the range where people say “It might be all right”. I am not sure I can provide the Deputy with much comfort in respect of that matter.

I am in favour of new banks entering the market, as long as they are well run by proper people.

Overview of Banking Sector: Central Bank (Continued)

Wednesday, 26 November 2014

Joint Committee on Finance, Public Expenditure and Reform Debate

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(Speaker Continuing)

[Professor Patrick Honohan:]  With regard to the question of the State starting a new bank, I hardly need to remind the Senator that the State owns two substantial banks at present. It is hard enough to fix the current problems. The problems, as the Senator said so rightly, are entangled with legacy business. A businessman coming to a new bank saying he would like a loan will first be asked what his current business is, and then he will be asked who he borrowed from before, thus bringing one back to the whole settlement. The banks are dealing with SME loans to some extent with split mortgage-type arrangements, similar to the half debt concept. Much of banks’ processing of SME cases is in this category. They try to separate the property-related debt, which they regard as a separate loan, from the ongoing business debts. The Senator is correct in saying that is an important part of the solution