INTEREST RATE PASS THROUGH A STUDY OF THE EXTENT AND SPEED OF INTEREST RATE PASS-THROUGH ON A BASKET OF RETAIL BANKING PRODUCTS

Transcription

1 INTEREST RATE PASS THROUGH A STUDY OF THE EXTENT AND SPEED OF INTEREST RATE PASS-THROUGH ON A BASKET OF RETAIL BANKING PRODUCTS July 2 1

2 Table Of Contents Executive Summary 2 Introduction 3 Study Findings 6 Summary 28 Appendix 29 2

3 Executive Summary: The Financial Regulator has examined: 1. The extent to which changes in wholesale or official interest rates are passed on to consumers of commonly held financial products, and 2. The speed at which interest rate pass-through occurs. The main findings of the study in respect of the selected basket of personal and small business banking products are as follows: 1. In the variable rate mortgage market the widening of spreads observed in the period from late 1998 to early 1999 was reversed in the period from late 1999 to early 2, coinciding with a new entrant joining the market. In general however, the study shows that the Irish variable rate mortgage market offers good value to consumers when compared to the prices available in the euro-area. The study does not find any evidence to suggest that in the variable rate mortgage market interest rate increases are passed on more quickly than interest rate decreases. In fact, although it is important to recognise that the sample size is small, there is some evidence that interest rate decreases were passed on to consumers more quickly than increases. There is evidence that there has been an upward drift in spreads in the variable rate mortgage market in the period since May In respect of non-mortgage lending products there was a widening of spreads between retail interest rates and official interest rates in the period from late 1998 to early 1999, at a time when Irish official rates were in sharp decline. Reductions in official interest rates since May 21 have not been passed on to consumers of these products in full resulting in a widening of average spreads. During both of these periods a widening of spreads was observed for all market participants. The spreads observed on personal loans and overdrafts and loans and overdrafts to small business and farmers seem wider in Ireland than in the euro-area generally. 3

4 3. Whenever there is a cut (or a rise) in the official interest rate, institutions must decide not only how they will pass on this cut (or rise) to borrowers but also how they will alter the amount paid to depositors. Over the study period average spreads on deposits have declined. This was inevitable as consumers would not accept a zero or negative interest rate. Interest rates paid on demand and notice deposits appear to be lower in Ireland that in the euro-area generally.. The interest rates charged on most lending products to consumers (other than mortgages and, to some extent, deposits) are largely unresponsive to changes in official interest rates. As a result measurement of the speed of pass-through becomes irrelevant.. For all products surveyed there was a broad range of interest rates charged by financial institutions over the study period.

5 INTRODUCTION The Financial Regulator has examined: 1. the extent to which changes in wholesale or official interest rates are passed on to consumers of commonly held, financial products, and 2. the speed at which interest rate pass-through occurs. The exercise was conducted because: a) The Financial Regulator believes that by becoming better informed about how various financial institutions passed on interest rate changes consumers can obtain better value in the marketplace, b) Concerns had been expressed publicly that interest rate reductions were not being passed on to mortgage holders, and c) The Financial Regulator believed that interest rates charged and paid on retail financial products should be highlighted to consumers. This exercise is not a measurement of bank profitability, nor does it purport to measure the spreads charged/paid by financial institutions across the whole of their range of financial products. For example, products aimed at investors and large businesses are excluded. Fixed rate products, whether loans or deposits were also excluded as the focus of the exercise is on typical personal and small business banking products that are capable of reacting to official interest rate movements in the short-term (i.e. one month). The Financial Regulator wrote to sixteen credit institutions seeking details of the interest rates charged on a range of products over the period 1 January 1998 to 3 June 23. All interest rates ascribed to Irish financial institutions, and all average interest rates ascribed to the industry are derived from this study. The participating financial institutions and the financial products included are set out in Table 1.

6 TABLE 1 Credit Institutions and Financial Products included in the study. Credit Institutions Financial Products ACC Bank plc Variable-Rate Mortgages Allied Irish Banks plc Credit Cards Anglo Irish Bank Corporation plc Personal Overdrafts Bank of Ireland Small Business Overdrafts/Farm Borrowings Bank of Scotland 1 Personal 1-Year Loans Bank of Scotland (Ireland) Limited Small Business 1-Year Loans EBS Building Society Personal 3-Year Loans First Active plc Small Business 3-Year Loans ICS Building Society Personal Demand Deposits IIB Bank Limited Personal One-Month Notice Deposits Irish Life and Permanent plc 2 Irish Nationwide Building Society MBNA Europe Bank Limited 3 National Irish Bank Limited Northern Rock plc Ulster Bank Ireland Limited For all products, financial institutions were asked to provide only their advertised nominal rates (excluding discounted or promotional rates which are more likely to reflect marketing strategies than inter rate movements). In the case of lending products, financial institutions were asked to assume that the borrower had an acceptable credit history, i.e., that the rate charged assumed that the borrower was likely to repay on time. The nominal rate required was the rate that at least half (in value terms) of the customers paid for the product 6. Graphs showing the history of the interest rate spread between official interest rates and the rates charged by each of the financial institutions on various products are at Appendix 1. The key relationship examined in this study is how the interest rate charged to the consumer changes when the official rate 7 changes. It should be borne in mind that the cost of funding is determined not only by the official rate, but also the rate that an institution pays out to its depositors, and is dependent on the proportion of funding based on each rate. In addition, the structure on an institutions funding, i.e, the proportion of funding based on each rate, may change over time. In simple terms financial institutions lend money to consumers for a price the interest rate. The price they charge should be a reflection of how much money costs them, adjusted for staff costs, buildings, administration, etc. and profits: 6 1 The UK Financial Services Authority is the home regulator of Bank of Scotland. 2 Irish Life and Permanent plc was created by the merger of Irish Life plc and Irish Permanent plc in 1999 and the acquisition of TSB Bank in 21. The Financial Regulator wrote to Irish Life and Permanent plc seeking data for this study and was provided with two sets of data, one relating to the business of Irish Permanent plc and a second relating to the business of TSB Bank, referred to as Permanent TSB in the study. Irish Life and Permanent plc have confirmed to The Financial Regulator that during the study period both suites of products would have been held by consumers, though some would have been closed to new consumers. Where relevant, both sets of data have been included. 3 The UK Financial Services Authority is the home regulator of MBNA Europe Bank Limited. The UK Financial Services Authority is the home regulator of Northern Rock plc The Small Business rate, also known as the AA rate, is the rate applied to small and medium enterprises in the primary, construction, manufacturing and services sectors. Most financial institutions have advised that this is also the rate applied to borrowings for farming purposes. 6 If the value in a particular product category consisted of several products, the financial institutions were required to quote the nominal rates for the main products (by product name) until %+ of the product category in terms of value was reached.

7 The key relationship examined in this study is how the interest 7 rate charged to the consumer changes when the official rate changes. In simple terms financial institutions lend money to consumers for a price the interest rate. The price they charge should be a reflection of how much money costs them (known as their funding costs), adjusted for staff costs, buildings, administration, bad debts etc and profits. It should be borne in mind that the cost of funding is determined not only the by official rate, but also the rate that an institution pays out to its depositors and the rate at which it can borrow funds from other financial institutions (the Interbank rate). Each institutions cost of funding is dependent on the proportion of funding based on each rate. In addition, the structure of an institutions funding, i.e. the proportion of funding based on each rate, may change over time. Finally, since the interest rate paid to depositors cannot fall below zero, as interest rates fall to low absolute levels the cost of funding rises. European Central Bank (ECB) interest rates. Interbank funding rates. Costs such as: salaries, buildings, administration, bad debts and profits. Interest rate charged to Borrowers Interest rates paid to depositors. In this study the focus is on the spread or difference between advertised nominal interest rates (the interest rate charged to borrowers) and the official rate. One might expect this spread to stay fairly constant except where there were major changes in an institution s overall source of funding. The findings of the study in relation to the extent or size of pass-through for each product category are set out in the following sections. The study shows that for the majority of financial products under consideration, the relationship between the interest rates charged to consumers and the official rate was too weak to allow a meaningful examination of the speed of interest rate pass-through. In other words, the question is not how quickly are changes passed on, but whether they are passed on at all in any meaningful way. For variable rate mortgages, personal demand deposits and personal one-month notice deposits the extent of pass through is more noticeable, and therefore an examination of the speed of pass through is possible. 7 7 Throughout this document we refer to term the official rate. The rate referred to is the European Central Bank s main refinancing operations minimum bid rate (the ECB repo rate) for the period since 1 January For the period 1 January 1998 to 1 January 1999 the rate used is that at which credit institutions conducted the bulk of their refinancing operations with the Central Bank of Ireland.

8 STUDY FINDINGS Explanatory Notes: The term Average Cost to Consumers means the average interest rate charged to consumers for the lending product by participating institutions over the study period. The term Average Rate Paid to Consumers means the average interest rate paid to consumers for the deposit product by participating institutions over the study period. The term Average Spread means: in the case of lending products, the difference between the Average Cost to Consumers and the average official interest rate. For example, if the Average Cost to Consumers for overdrafts is 1% and the average official interest rate is % then the Average Spread is 11%. in the case of deposit products, difference between the Average Rate Paid to Consumers and the average official interest rate. For example if the Average Rate Paid to Consumers on demand deposits is 1% and the average official interest rate is 3% then the Average Spread is 2%. The averages used in this study are not comprehensively weighted averages, in that where a financial institution had more than one product in a product category the averages do not give a weighting to every individual product. If the value in a particular product category consisted of several products, the financial institutions were required to quote the nominal rates for the main products (by product name) until %+ of the product category in terms of value was reached. The averages are, however, weighted in respect of time. This should be borne in mind when comparisons between the data in this study and other published data are made. 8

9 VARIABLE RATE MORTGAGES Looking across all of the retail financial products surveyed it is clear that the interest rates charged on variable interest rate mortgages, both to new and existing customers, and regardless of the loan-to-value ratio, are those most sensitive to movements in the official rate. There were 13 financial institutions active in the variable rate mortgage market in the study period 8. In the period from late 1998 to late 1999, the failure to pass on official interest rate reductions in full to borrowers resulted in a significant widening of spreads. The highest average spread observed over the period of the study was 3.28% in December This effect was reversed however in late The significant reduction in the scale of average spreads in the period from this time to early 2 coincides with the entry of Bank of Scotland to this market in September Reductions in official rates since late 22 have not been passed on in full to borrowers, resulting in a drift in spreads. The average spread was 1.83% at 3 June 23. The lowest and highest interest rates charged for variable mortgages at 3 June 23 were 3.3% and.78% respectively. In general, the interest rates charged on residential mortgages in Ireland would seem to compare favourably with the average cost of such loans in the euro-area. The average interest rate on variable interest mortgages to new customers in the Irish market at 3 June 23 was 3.% 9 compared to 3.8% 1 in the euro-area generally 11. The average interest rate charged on existing variable rate mortgages with loan to value ratios of 8% or less by the various market participants in the period 1 September 1999 to 3 June is set out in Table 2 below. The range is from.8% to 6.7%. In this period the average official rate was 3.%. 8 Bank of Scotland was not in the market for the whole of the period, it began to offer mortgages in September Source: data provided for this study. 1 Source: Euro Area MFI Interest Rate Statistics, published by the ECB. This is the source of all comparisons with euro-area interest rates. 11 Discounted or promotional products, which are a feature of this market, were excluded from the study because they are more likely to reflect marketing strategies than interest rate movements. It should be recognised however that the inclusion of these products would be likely to reduce average interest rate figures and average spread figures. 12 As Bank of Scotland only entered the market on 1 September 1999 this is the period in which all survey participants were active in the market. 9

10 TABLE 2 Average interest rate and average spread on variable rate mortgages. 1 January 1999 to 3 June 23. Institution Average interest rate Spread over average official rate EBS Building Society.8%.911% Permanent TSB.8%.97% Allied Irish Banks plc..7%.98% Bank of Scotland.628% 1.% Irish Permanent plc.63% 1.7% Ulster Bank Ireland Limited.871% 1.298% Bank of Ireland.6% 1.32% ACC Bank plc..12% 1.39% ICS Building Society.23% 1.% IIB Bank Limited.32% 1.9% First Active plc.2% 1.78% National Irish Bank Limited.72% 1.99% Irish Nationwide Building Society 6.7% 3.171% The behaviour of average spreads including the recent drift of spreads in the variable rate mortgage market can be seen from the following graphs: Variable Rate Mortgages - Existing Customers Average Cost to Consumer Average Spread

11 Variable Rate Mortgages for New Customers (ltv >8%) Average Cost to Consumer Average Spread //1998 1/9/1998 1//19991/9/1999 1//21/9/2 1//211/9/21 1//221/9/22 1//23 Speed of Pass Through Turning to the speed at which interest rate changes are passed on to consumers of variable rate mortgages, over the study period there were 19 changes in the official rate, 7 increases and 12 decreases. For the purpose of the study, the six official interest rate changes most isolated in time from other interest rate changes were considered. This was so 8 that there was the greatest likelihood that movements in retail rates were directly associated with these particular official 7 rate changes. Those dates, which co-incidentally comprised three rate increases and three rate decreases, were 6 November 1999 Official rate rose by.% February 2 Official rate rose by.2% 1 September 2 Official rate rose by.2% 11 May 21 Official rate fell by.2% 6 December 22 Official rate fell by.% 7 March 23 Official rate fell by.2% 1 We have looked at the 31-day period (a calendar month) after each of the above official rate changes and noted the length of time it took for the retail rate to react to that change (note that this does not necessarily mean that the official interest rate change was past on if full). If a financial institution s interest rate did not change within the 31-day period it was considered not to have responded to the official rate change. 3 2 Variable Rate Mortgages for New Customers (ltv > 8%) 11

12 TABLE 3 Speed of pass through on variable rate mortgages (in days) 13 Date Financial Institution INTEREST RATE INCREASES ACC Bank plc Allied Irish Banks plc Bank of Ireland Bank of Scotland EBS Building Society First Active plc ICS Building Society IIB Bank Limited Irish Nationwide Building Society National Irish Bank Limited Permanent TSB Irish Permanent plc Ulster Bank Ireland Limited INTEREST RATE DECREASES / The financial institutions can be listed by the number of the official rates increases and decreases passed on within 31 days as follows: TABLE Variable Rate Mortgages - number of official rate increases passed on within 31 days. Institution Number of rate changes passed on within 31 days EBS Building Society 3 Irish Permanent plc 3 National Irish Bank Limited 3 ACC Bank plc 2 Bank of Scotland 2 IIB Bank Limited 2 Bank of Ireland 1 First Active plc 1 Irish Nationwide Building Society 1 Ulster Bank Ireland Limited 1 Allied Irish Banks plc ICS Building Society Permanent TSB If a box is shaded the relevant financial institution did not respond to the interest rate change within 31 days. 1 First Active reduced its rate twice in the 31-day period; from.2% to.11% on day 7 and from.11% to 3.99% on day 26.

13 TABLE Variable Rate Mortgages - number of official rate decreases passed on within 31 days. Institution Number of rate changes passed on within 31 days Allied Irish Banks plc 3 Bank of Scotland 3 EBS Building Society 3 IIB Bank Limited 3 Irish Nationwide Building Society 3 Irish Permanent plc 3 National Irish Bank Limited 3 ACC Bank plc 2 Bank of Ireland 2 First Active plc 2 Permanent TSB 2 Ulster Bank Ireland Limited 1 ICS Building Society The study does not find any evidence to suggest that interest rate increases are passed on more quickly than interest rate decreases. While it may often take up to a month or longer for pass-through to take place, this appears to apply to both increases and decreases. Though it is important to recognise that the sample size is small, there is some evidence that interest rate decreases are passed on to consumers more quickly than increases. Of the interest rate changes described in Table 3, interest rate increases were passed on within 31 days on 9% of occasions while interest rate decreases were passed on within 31 days on 77% of occasions. 13

14 CREDIT CARDS The interest rates charged on standard credit cards have a very weak relationship with the official rate. The average spread on credit card interest rates over the official rate has widened since August 21 from 13.86% at that time to 1.86% in 3 June 23, when the average credit card interest rate was 17.86%. The lowest and highest credit card interest rates at 3 June 23, on a standard card (i.e. excluding introductory offers) were 16.8% and 18.9%, respectively. The euro-area MFI Interest Rate Statistics published by the European Central Bank do not cover credit cards (as a separate product category). It is noted however that in the UK, in March 2 at a time when the Bank of England official rate was.%, the average interest rate charged on a standard credit card by six of the largest credit card issuers (again excluding introductory offers) was 1.6% 1, a spread of 11.6%. The Financial Regulator has recently published the first of a series of credit card cost surveys in order to bring greater price transparency to this market. The average interest rate charged on credit cards by the various market participants in the period 1 January 1998 to 3 June 23 is set out in Table 6 below. In this period the average official rate was 3.8%. TABLE 6 Average interest rate and average spread on credit cards. 1 January 1998 to 3 June 23. Institution Average interest rate Average spread over average official rate ACC Bank plc 17.12% 13.21% National Irish Bank Limited 17.7% % MBNA Europe Bank Limited % 1.321% Permanent TSB % 1.38% Allied Irish Bank plc 19.66% 1.79% Ulster Bank Ireland Limited 2.173% % Bank of Ireland 2.77% % EBS Building Society % 18.71% 1 1 Based on an internet search of the products offered by Barclays, Royal Bank of Scotland, HBOS, Lloyds TSB, MBNA, and HSBC.

15 The following graph shows that while average spreads declined in the period from approximately mid 1998 to early 22, spreads have noticeably widened since then as decreases in official interest rates were not passed on in full to consumers: Credit Cards Average Cost to Consumer Average Spread //1998 1/9/1998 1//19991/9/1999 1//21/9/2 1//211/9/21 1//221/9/22 1//23 1

16 PERSONAL LOANS AND OVERDRAFTS Interest rates charged on personal overdrafts and unsecured short-term loans have a weak relationship to changes in the official rate. It is clear that the reductions in official rates over the study period have not been passed on in full to borrowers. For personal loans average spreads have widened over the study period from.32% in January 1998 to 7.67% at 3 June 23. As at 3 June 23 the lowest and highest interest rates for personal loans were 7.6% and 13.9% respectively. Average spreads on personal overdrafts have also widened over the study period from.1% in January 1998 to 8.8% at 3 June 23. As at 3 June 23 the lowest and highest interest rates for overdrafts were 9.7% and 11.6% respectively. A significant widening of spreads occurred in the period from late 1998 to early In June 23, Irish personal overdraft and personal loan average interest rates of 1.8% and 9.67%, respectively are higher than those observed in the euro area generally, which were 9.89% and 7.37% for personal overdrafts and personal loans respectively 16. The average interest rate charged on personal loans and overdrafts by the various market participants in the period 1 January 1998 to 3 June 23 are set out in Tables 7 and 8 below. In this period the average official rate was 3.8%. 16 Source: Irish data: This study Euro area data: Euro Area MFI Interest Rate Statistics, published by the ECB. 16

17 TABLE 7 Average interest rate and average spread on personal loans. 1 January 1998 to 3 June 23. Institution Average interest rate Spread over average official rate First Active plc 8.92%.11% Ulster Bank Ireland Limited 9.67%.716% Bank of Ireland 1.732% 6.881% ACC Bank plc 1.817% 6.966% Permanent TSB 1.92% 7.73% Allied Irish Banks plc 1.928% 7.77% National Irish Bank Limited 11.72% 7.221% Irish Permanent plc 11.9% 8.99% TABLE 8 Average interest rate and average spread on personal overdrafts. 1 January 1998 to 3 June 23. Institution Average interest rate Spread over average official rate Irish Permanent plc 1.699% 6.88% Ulster Bank Ireland Limited % 7.33% National Irish Bank Limited % 7.38% Allied Irish Banks plc 11.31% 7.6% ACC Bank plc % 7.68% Permanent TSB 11.72% 7.621% Bank of Ireland 11.79% 7.88% 17

18 Again we can see clearly from the following graphs that spreads for both personal loans and personal overdrafts have widened noticeably over recent years, although the average cost to the consumer is steadily falling, reflecting the fact that some, but not all, of the decreases in official interest rates have been passed on to the consumer. Personal Loans Average Cost to Consumer Average Spread Personal Overdrafts Average Cost to Consumer Average Spread

19 OVERDRAFTS AND SHORT TERM 17 UNSECURED LOANS TO SMALL BUSINESS (INCLUDING FARMERS) As with personal loans and overdrafts, rates on overdrafts and short term unsecured loans to small business have a weak relationship with the official rate. Similarly, it is clear that the reductions in official rates over the study period have not been passed on in full to borrowers. At 3 June 23, the lowest and highest interest rates for small business overdrafts were 7% and 9.2% respectively and.7% and 8.% for small business loans. The average interest rate charged on small business overdrafts and loans by the various market participants in the period 1 January 1998 to 3 June 23 are set out in Tables 9 and 1 below. In this period the average official rate was 3.8%. TABLE 9 Average interest rate and average spread on small business overdrafts. 1 January 1998 to 3 June 23. Institution Average interest rate Spread over average official rate Bank of Scotland (Ireland) Limited 6.9% 3.9% ACC Bank plc 8.679%.828% National Irish Bank Limited 9.29%.398% Ulster Bank Ireland Limited 9.39%.98% Allied Irish Banks plc 9.373%.22% Permanent TSB 9.%.93% Bank of Ireland 9.28%.677% Five years or less.

20 TABLE 1 Average interest rate and average spread on small business loans. 1 January 1998 to 3 June 23. Institution Average interest rate Spread over average official rate Bank of Ireland 8.293%.2% Ulster Bank Ireland Limited 8.373%.22% National Irish Bank Limited 8.11%.6% ACC Bank plc 8.771%.92% Permanent TSB 9.%.1% Allied Irish Banks plc 9.98% 6.97% The extent to which Irish interest rates exceed the euro-area average is more pronounced in this category. The average overdraft rates and loan rates levied in Ireland on 3 June 23 were 8.28% and 7.32% respectively, while the averages in the euro area generally were.68% and.%. 2

21 1 As with personal loans and overdrafts a noticeable widening of margins occurred in the period from late 1998 to early 1999 as can be seen from the following graphs: Small Business Overdrafts Average Cost to Consumer Average Spread Average Small Business Loans Average Cost to Consumer Average Spread Average Small Business Loans 11 21

22 DEMAND DEPOSITS (PERSONAL) There were 13 financial institutions active in the market for demand deposits of less than, in the study period 18. Whenever there is a cut (or a rise) in the official interest rate, institutions must decide not only how they will pass on this cut (or rise) to borrowers but also how they will alter the amount paid to depositors. Over the study period the spread between the average official interest rate and the average interest rate paid on demand deposits has varied substantially. The narrowing of spreads over recent years (from a highest spread of.2% in October 1998, to the lowest spread of 1.67% in June 23, at a time when the average demand deposit rate was.33%) is probably due to the fact that the official rate has fallen so low that spreads simply could not be maintained because consumers would not accept a zero or negative rate of interest on a deposit account. Given that the rate of interest paid on deposits influences the rate of interest charged on loans, this zero or negative rate effect is likely to have influenced the behaviour of lending rates also. At 3 June 23, the lowest and highest demand deposit rates were.2% and 1.8%, respectively. The average interest rate paid on personal demand deposits by the various market participants in the period 1 January 1998 to 3 June 23 are set out in Table 11 below. In this period the average official rate was 3.81%. 18 Bank of Scotland (Ireland) Limited advised that the integration and migration of systems following the merger between ICC Bank plc and Bank of Scotland (Ireland) Limited during 21 complicates a fully detailed analysis, with difficulties in extracting data for some of the period under review. Where this was the case rate sheets were used to provide the information. 22

23 TABLE 11 Average interest rate and average spread on personal demand deposits. 1 January 1998 to 3 June 23. Institution Average interest rate Spread between average interest rate and average official rate Northern Rock plc.19%.26% (over the average official rate) 19 ACC Bank plc.822% 3.29% EBS Building Society.78% 3.67% Ulster Bank Ireland Limited.722% 3.129% Allied Irish Banks plc.89% 3.262% Anglo Irish Bank Corporation plc.71% 3.28% Permanent TSB.63% 3.288% ICS Building Society.6% 3.% Irish Permanent plc.3% 3.17% National Irish Bank Limited.386% 3.6% Irish Nationwide Building Society.371% 3.8% Bank of Ireland.368% 3.83% First Active plc.26% 3.86% The average interest rate paid on demand deposits in Ireland is lower than the average paid in the euro area generally. The average rate paid on demand deposits in Ireland on 3 June 23 was.33%(see graph below), while that paid in the euro area generally was.76%. Demand Deposits Average Rate Paid to Consumer Average Spread Speed of Pass Through As with the examination of the speed of pass through in the variable rate mortgage market, we have looked at the 31-day period (a calendar month) after each of the same official rate changes and noted the length of time it took for the retail rate to reflect that change. If a financial institution s interest rate did not change within the 31-day period it was considered not to have responded to the official rate change. 19 This institution offered a rate higher than the official rate at times during the study period. This figure expresses the average amount by which their rate exceeded the average official interest rate over the study period. 23

24 TABLE 12 Speed of pass through on personal demand deposits <, Date Financial Institution ACC Bank plc Allied irish Banks plc Anglo Irish Bank Corporation plc Bank of Ireland EBS Building Society First Active plc ICS Building Society Irish Nationwide Building Society National Irish Bank Limited Northern Rock plc 2 Permanent TSB Irish Permanent plc Ulster Bank Ireland Limited RATE INCREASES RATE DECREASES From Table 12 we can see that the three decreases in the official rate were passed on within 31 days by more institutions than the three increases in the official rate were. 2 Note: Northern Rock offered demand deposit products in the Irish market from 13 November 1999, i.e., were not operating in the market at this stage. 2

25 The financial institutions can be ranked by the number of the increases or decreases in the six selected official rates that are passed on within 31 days as follows: TABLE 13 Demand Deposits of, or less - number of official rate increases passed on within 31 days. Institution Number of rate changes passed on within 31 days Northern Rock plc 2 Bank of Ireland 1 EBS Building Society 1 ICS Building Society 1 Ulster Bank Ireland Limited 1 ACC Bank plc Allied Irish Banks plc Anglo Irish Bank Corporation plc First Active plc Irish Nationwide Building Society Irish Permanent plc National Irish Bank Limited Permanent TSB TABLE 1 Demand Deposits of, or less - number of official rate decreases passed on within 31 days. Institution Number of rate changes passed on within 31 days Northern Rock plc 3 Allied Irish Banks plc 2 Bank of Ireland 2 EBS Building Society 2 First Active plc 2 ICS Building Society 2 Ulster Bank Ireland Limited 2 ACC Bank plc 1 Irish Permanent plc 1 Permanent TSB 1 Anglo Irish Bank Corporation plc Irish Nationwide Building Society National Irish Bank Limited 2

26 ONE-MONTH NOTICE DEPOSITS (PERSONAL) There were 13 financial institutions active in the 3 day notice deposits of greater than 2, market in the study period. Spreads between the official rate and the average interest rate paid for one-month notice deposit accounts have narrowed over the period, from the highest spread of 2.72% in October 1998 to an average spread of 1.2% at 3 June 23. The average interest rate for one-month notice deposits at 3 June 23 was.98%. As with demand deposits, the narrowing of spreads is probably due to the fact that the official rate has fallen so low that spreads simply could not be maintained. The lowest and highest interest rates for one-month notice deposits at 3 June 23 were nil and 3.% respectively. The average interest rate paid on personal one-month notice deposits by the various market participants in the period 1 January 1998 to 3 June 23 are set out in Table 1 below. In this period the average official rate was 3.8%. TABLE 1 Average interest rate and average spread on one-month notice deposits. 1 January 1998 to 3 June 23. Institution Average interest rate Spread between average interest rate and average official rate Northern Rock plc 3.82%.27% Irish Nationwide Building Society 3.181%.67% Anglo Irish Bank Corporation plc 2.86% 1.% ICS Building Society 2.836% 1.1% Allied Irish Bank plc 2.62% 1.289% Bank of Scotland (Ireland) Limited 2.331% 1.2% Ulster Bank Ireland Limited 2.81% 1.77% EBS Building Society 1.889% 1.962% Permanent TSB 1.719% 2.132% First Active plc 1.69% 2.192% ACC Bank plc 1.69% 2.192% Irish Permanent plc.922% 2.929% National Irish Bank Limited.93% 2.98% 26

27 The average interest rate paid on demand deposits in Ireland is lower than the average paid in the euro area generally. The average rate paid on one-month deposits in Ireland on 3 June 23 was.98%, while that paid on notice deposits of up to three months notice in the euro-area generally was 2.23%. One-Month Notice Deposits (Personal) Average Rate Paid to Consumer Average Spread Speed of Pass Through As before, we have looked at the 31-day period (a calendar month) after each of the same official rate changes and noted the length of time it took for the retail rate to react to that change (as with variable rate mortgages this does not necessarily mean that the official interest rate change was passed on in full). If a financial institution s interest rate did not change within the 31-day period it was considered not to have responded to the official rate change. 27

28 TABLE 16 Speed of pass through on One-Month Notice Deposits > 2, Date Financial Institution ACC Bank plc Allied irish Banks plc Anglo Irish Bank Corporartion plc Bank of Scotland (Ireland) Limited EBS Building Society First Active plc ICS Building Society 21 Irish Nationwide Building Society National Irish Bank Limited Northern Rock plc 22 Permanent TSB Irish Permanent plc Ulster Bank Ireland limited RATE INCREASES RATE DECREASES As was the case with demand deposits, we see that the three decreases in the official rate were reacted to by more institutions than the increases in the official rate within the 31-day period. Two institutions reacted to increases for each of the three increases in the official rate within the 31-day period. Four institutions reacted to decreases for each of the three decreases in the official rate within the 31-day period. 21 Bank of Ireland advised that deposit business in this category is referred to their associated company ICS Building Society. 22 Note: Northern Rock offered one-month deposit products in the 28 Irish market from 1 November 21.

29 The financial institutions can be ranked by the number of the increases or decreases in the six selected official rates that are passed on within 31 days as follows: TABLE 17 One-month notice deposits > 2, - number of official rate increases passed on within 31 days. Institution Number of rate changes passed on within 31 days Anglo Irish Bank Corporation plc 3 Bank of Scotland (Ireland) Limited 3 ICS Building Society 2 EBS Building Society 1 Irish Permanent plc 1 Ulster Bank Ireland Limited 1 ACC Bank plc Allied Irish Banks plc First Active plc Irish Nationwide Building Society National Irish Bank Limited Northern Rock plc Permanent TSB TABLE 18 One-month notice deposits > 2, - number of official rate decreases passed on within 31 days. Institution Number of rate changes passed on within 31 days Allied Irish Banks plc 3 Bank of Scotland (Ireland) Limited 3 Irish Permanent plc 3 Permanent TSB 3 ACC Bank plc 2 First Active plc 2 ICS Building Society 2 Ulster Bank Ireland Limited 2 EBS Building Society 1 Irish Nationwide Building Society 1 National Irish Bank Limited 1 Anglo Irish Bank Corporation plc Northern Rock plc 29

30 Appendix 3

31 ACC Bank plc Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Average Personal Loan Spread Average AA Loan Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

32 Allied Irish Banks plc Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Average Personal Loan Spread Average AA Loan Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

33 Anglo Irish Bank Corporation plc 6 Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

34 Bank of Ireland Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Average Personal Loan Spread Average AA Loan Spread Deposit Products Average Demand Deposit Spread 3

35 Bank of Scotland Lending Products Variable Mortgage Rate

36 Bank of Scotland (Ireland) Limited Deposit Products Average One-Month Notice Deposit Spread Average Demand Deposit Spread

37 EBS Building Society Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

38 First Active Plc Lending Products Average Variable Mortgage Rate Spread Average Personal Loan Spread Deposit Products Average Demand Deposit Spread Average One-hMonth Notice Deposit Spread

39 ICS Building Society Lending Products Average Variable Mortgage Rate Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

40 IIB Bank Limited Lending Products Average Variable Mortgage Rate Spread

41 Irish Permanent plc Lending Products Average Variable Mortgage Rate Spread Average Personal Loan Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

42 Permanent TSB Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Average Personal Loan Spread Average AA Loan Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

43 Irish Nationwide Building Society Lending Products Average Variable Mortgage Rate Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

44 MBNA Europe Bank Limited Lending Products Average Credit Card Spread

45 National Irish Bank Limited Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Average Personal Loan Spread Average AA Loan Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

46 Northern Rock Plc 6 Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

47 Ulster Bank Ireland Limited Lending Products Average Variable Mortgage Rate Spread Average Credit Card Spread Average Personal Loan Spread Average AA Loan Spread Deposit Products Average Demand Deposit Spread Average One-Month Notice Deposit Spread

48 6-8 College Green, Dublin 2, Ireland T Consumer help-line lo call Register of Financial Service Providers help-line lo call F Information Centre: 6-8 College Green, Dublin 2 Irish Financial Services Regulatory Authority.