Cantillon: Noonan dresses-down banks he owns

The banks have been hauled into the Minister for Finance’s office once again for a dressing-down over standard variable mortgage rates, which remain among the highest in Europe.

The public nature of the admonishment is in proportion the inability of the Minister to effect any change. The proximity to the budget also speaks to his impotence in this regard. The implicit threat is that unless he sees some sort of meaningful response, he will introduce punitive measures next month.

How likely is this really? Not very. Leaving aside the issue of whether the budget is the appropriate vehicle for settling scores with recalcitrant bankers, the Minister’s real problem is that he is the owner of the two biggest banks and a big shareholder in the third.

Part and parcel of his budget arithmetic is the selling-down of the State’s shareholding in AIB, Permanent TSB and Bank of Ireland. He may even be counting dividend payments from Bank of Ireland.

The large margins charged on variable rate mortgages are a not-insignificant part of the renewed profitability of all three banks. Thus, any measures he introduces to reduce margins also reduces the value of the banks. Their attractiveness is also reduced if investors perceive that the Government will intervene if it thinks banks are making too much money out of their customers. Everybody from the European Commission down has made this point.

All of this makes it very likely that the Government is bluffing and this week’s pre-budget theatrics are just part of the charade. However, it might not be in the interest of AIB and Permanent TSB to call Michael Noonan’s bluff given the size of the State’s shareholdings in the two institutions. Bank of Ireland is in a different category.