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Opinion: Fix the mortgage rate problem in Ireland by considering public ownership of banks

Cillian Doyle says there are positive international examples of how large banks taken into public ownership can work better for customer, environment and economy.

Cillian Doyle Political economist

LAST WEEK SINN Féin’s Pearse Doherty highlighted how Irish borrowers now face the highest mortgage interest rates in the EU.

Citing research from the Central Bank, Doherty pointed out how our average interest rates are now ‘more than twice the EU average’ costing around €60,000 more over the lifetime of the mortgage.

As former President of the European Central Bank Mario Draghi pointed out in 2018, the Irish banking system operates as a “quasi-monopoly”.

The exit of Bank of Scotland, Danske Bank and the liquidation of Irish Nationwide Building Society over the last decade, coupled with uncertainty about the future of Ulster bank here, means you could soon be justified in dropping the ‘quasi’ part of that description.

The competition crisis

Another reason Irish banks charge higher rates is because of higher capital requirements relative to European peers. This is because of the history of the Global Financial Crisis and its imprint on the banks’ internal risk models.

The boom-bust history pushes up risk ratings in their internal models so when they write a new mortgage based on past history, the capital requirements are 2-3x the level of European peers. To make the same return, they must therefore charge 2-3x the rate. 

The banks’ internal risk models are backwards-looking over a 20-year+ period, meaning it could be at least another 10 years before these capital requirements begin to ease and the experience of the GFC begins to fade in terms of impact.

Screen Shot 2021-01-21 at 11.51.51 Source: Deutsche Bank

So, what can be done? AIB, which is currently 71% state-owned, could be turned in a full public bank for a certain pre-agreed period of time (say 10 years), to act as a strategic mortgage lender providing subsidised rates in line with the EU average, and providing a social need to a segment of the population that has been left behind – the millennial low paid, zero wealth, renter.

This strategy would be unlikely to contravene EU State Aid rules as the rates AIB would be able to offer (at a subsidised rate) would be in line with EU peers. It would simply be addressing a private sector problem with a public sector solution.

In 2017 the state sold just under 29% of its stake in AIB for €3.4 billion. Due to the collapse in AIB’s share price, we could buy it back for around €1.6 billion, making a significant gain in the process..

To put that €1.6 billion figure in context, the cost to the state of the Employee Wage Subsidy Scheme has been around €4.5 billion to date.

In fact, the total dividend pay-out that AIB made to shareholders in 2018 and 2019 was €787 million, almost half the cost it would take to bring the bank into full public ownership.

In terms of whether AIB is a risky asset for the state to hold, as the Department of Finance’s own data shows, AIB’s exposure to non-performing loans fell massively in recent years down from 37% in 2013 to just over 5% in 2019. They are in line with the EU average and the ECB’s guidance of achieving a 5% NPL ratio.

Screen Shot 2021-01-21 at 11.52.04

A public bank whose lending was guided by a public purpose, rather than an attempt to make a profit for its shareholders, could help to solve the housing crisis, provide housing to a generation neglected by the system, reduce the cost of living and boost spending power within the economy post-Covid.

The argument for public ownership

Research by the IMF (2020) demonstrated that during the Global Financial Crisis (GFC), public banks lent relatively more than domestic private banks in many countries thus helping to stabilise their economies.

In other words, their public purpose allowed them to play more of a countercyclical ameliorating the worst parts of the crisis. As the Financial Times pointed out this week, Eurozone banks have been scaling bank lending to households and businesses due to the Covid crisis.

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Support for public banks has been growing over the last decade. In the US, California, Washington and New York have recently made moves to set up public banks, spurred on by the success of North Dakota’s State-wide public bank.

Driven by recent “market failures” in the commercial banking sector, the predatory lending that preceded the 2009 crisis, illegal foreclosures, etc, a growing public banking movement has taken root. 

Democratic Congresswomen in the US, Rashida Tlaib and Alexandria Ocasio-Cortez recently introduced the Public Banking Act, which would make it easier for public banks to exist and provide them with start-up grant money.

Citing issues of a lack of affordable housing and the need to fund green energy projects she said: “Public banks empower states and municipalities to establish new channels of public investment to help solve systemic crises.

In Europe, public banks could be key to funding a green energy transition. In Germany, the most successful EU and advanced country in developing a clean energy economy, the publicly-owned development bank KfW has been instrumental.

According to Stephany Griffith-Jones KfW has underwritten around one-third of all financing of Green Investments in Germany.

Ireland needs its own public bank. Several years ago, the government considered a public banking model along the line of Germany’s. And whilst its introduction would be welcome, we’ve yet to see any movement on this and its setup would take time.

A quicker response would be to buy out AIB’s shareholders, keep the staff and organisational structure in place, whilst temporarily repurposing it away from private profit towards the public good.

Otherwise, we could be facing at least another decade of rip off mortgage rates.

Cillian Doyle is a political economist and Sinn Féin policy advisor at the Houses of the Oireachtas. The views expressed here are his own.

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Cillian Doyle  / Political economist

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