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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 2004

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Table Of Contents

Executive Summary 2

Introduction 3

Study Findings 6

Summary 28

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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 2000, 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 2001.

2. 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 2001 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.

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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.

4. 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.

5. For all products surveyed there was a broad range of interest

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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 30 June 2003. 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.

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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 2001. 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.

4 The UK Financial Services Authority is the home regulator of

Northern Rock plc

5 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 50%+of the product category in terms of value was reached.

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 product6.

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 rate7changes. 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:

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 Borrowings5 Bank of Scotland1 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 plc2

Irish Nationwide Building Society MBNA Europe Bank Limited3 National Irish Bank Limited Northern Rock plc4

Ulster Bank Ireland Limited

Credit Institutions and Financial Products included in the study.

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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 1999. 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.

The key relationship examined in this study is how the interest7 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.

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.

European Central Bank

(ECB) interest

rates.

Costs such as: salaries, buildings, administration, bad debts and profits. Interest rate charged to Borrowers Interbank funding rates. Interest rates paid to depositors.

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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 15% and the average official interest rate is 4% 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 50%+ 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.

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9

8 Bank of Scotland was not in the market for the whole of the

period, it began to offer mortgages in September 1999.

9 Source: data provided for this study.

10 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.

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 period8.

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 1998. This effect was reversed however in late 1999. The significant reduction in the scale of average spreads in the period from this time to early 2000 coincides with the entry of Bank of Scotland to this market in September 1999. Reductions in official rates since late 2002 have not been passed on in full to borrowers, resulting in a drift in spreads. The average spread was 1.83% at 30 June 2003. The lowest and highest interest rates charged for variable mortgages at 30 June 2003 were 3.3% and 5.78% 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 30 June 2003 was 3.5%9compared to 3.8%10in the euro-area generally11.

The average interest rate charged on existing variable rate mortgages with loan to value ratios of 80% or less by the various market participants in the period 1 September 1999 to 30 June 200312is set out in Table 2 below. The range is from 4.48% to 6.75%. In this period the average official rate was 3.44%.

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The behaviour of average spreads including the recent drift of spreads in the variable rate mortgage market can be seen from the following graphs:

Institution Average interest rate Spread over average official rate

EBS Building Society 4.484% 0.911%

Permanent TSB 4.548% 0.975%

Allied Irish Banks plc. 4.557% 0.984%

Bank of Scotland 4.628% 1.054%

Irish Permanent plc 4.630% 1.057%

Ulster Bank Ireland Limited 4.871% 1.298%

Bank of Ireland 5.006% 1.432%

ACC Bank plc. 5.012% 1.439%

ICS Building Society 5.023% 1.450%

IIB Bank Limited 5.032% 1.459%

First Active plc 5.052% 1.478%

National Irish Bank Limited 5.072% 1.499%

Irish Nationwide Building Society 6.745% 3.171% Average interest rate and average spread on variable rate mortgages.

1 January 1999 to 30 June 2003.

TABLE 2

Variable Rate Mortgages - Existing Customers

0 1 2 3 4 5 6 7 8

Average Cost

to Consumer Average Spread

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11

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 that there was the greatest likelihood that movements in retail rates were directly associated with these particular official rate changes. Those dates, which co-incidentally comprised three rate increases and three rate decreases, were

• 5 November 1999 Official rate rose by 0.5%

• 4 February 2000 Official rate rose by 0.25%

• 1 September 2000 Official rate rose by 0.25%

• 11 May 2001 Official rate fell by 0.25%

• 6 December 2002 Official rate fell by 0.5%

• 7 March 2003 Official rate fell by 0.25%

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.

01/01/199801/05/1998 01/09/199801/01/199901/05/199901/09/199901/01/200001/05/200001/09/200001/01/200101/05/200101/09/200101/01/200201/05/200201/09/2002 01/01/200301/05/2003

Variable Rate Mortgages for New Customers (ltv

>

80%)

0 1 2 3 4 5 6 7 8 Average Cost

to Consumer Average Spread

Variable Rate Mortgages for New Customers (ltv > 80%)

0 1 2 3 4 5 6 7 8

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13 If a box is shaded the relevant financial institution did not

respond to the interest rate change within 31 days.

14First Active reduced its rate twice in the 31-day period; from

4.24% to 4.115% on day 7 and from 4.115% to 3.99% on day 26.

Speed of pass through on variable rate mortgages (in days)13

TABLE 3

INTEREST RA TE INCREASES INTEREST RA TE DECREASES

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 P

ermanent plc

Ulster Bank Ireland Limited

Variable Rate Mortgages - number of official rate increases passed on within 31 days.

TABLE 4

The financial institutions can be listed by the number of the official rates increases and decreases passed on within 31 days as follows:

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 0

ICS Building Society 0

Permanent TSB 0

Date Financial Institution

05.11.99 26 7 26 26 26 17

04.02.00 31 26 26 26 31 26

01.09.00 15 30 5 30 28 12 21

11.05.01 4 14 21 21 21 21 6 21

06.12.02 13 10 26 26 10 26 17 6 27 27

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13

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 49% of occasions while interest rate decreases were passed on within 31 days on 77% of occasions.

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 0

Variable Rate Mortgages - number of official rate decreases passed on within 31 days.

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15 Based on an internet search of the products offered by

Barclays, Royal Bank of Scotland, HBOS, Lloyds TSB, MBNA, and HSBC.

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 2001 from 13.86% at that time to 15.86% in 30 June 2003, when the average credit card interest rate was 17.86%. The lowest and highest credit card interest rates at 30 June 2003, 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 2004 at a time when the Bank of England official rate was 4.00%, the average interest rate charged on a standard credit card by six of the largest credit card issuers (again excluding introductory offers) was 15.6%15, 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 30 June 2003 is set out in Table 6 below. In this period the average official rate was 3.85%.

Institution Average interest rate Average spread over

average official rate

ACC Bank plc 17.102% 13.251%

National Irish Bank Limited 17.470% 13.619%

MBNA Europe Bank Limited 18.173% 14.321%

Permanent TSB 19.236% 15.385%

Allied Irish Bank plc 19.646% 15.795%

Ulster Bank Ireland Limited 20.173% 16.322%

Bank of Ireland 20.770% 16.919%

EBS Building Society 22.322% 18.471%

Average interest rate and average spread on credit cards. 1 January 1998 to 30 June 2003.

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15

The following graph shows that while average spreads declined in the period from approximately mid 1998 to early 2002, spreads have noticeably widened since then as decreases in official interest rates were not passed on in full to consumers:

01/01/199801/05/1998 01/09/199801/01/199901/05/199901/09/199901/01/200001/05/200001/09/200001/01/200101/05/200101/09/200101/01/200201/05/200201/09/200201/01/200301/05/2003

12 13 14 15 16 17 18 19 20 21 22 23

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16 Source: Irish data: This study Euro area data: Euro Area MFI

Interest Rate Statistics, published by the ECB.

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 5.32% in January 1998 to 7.67% at 30 June 2003. As at 30 June 2003 the lowest and highest interest rates for personal loans were 7.64% and 13.9% respectively.

Average spreads on personal overdrafts have also widened over the study period from 5.41% in January 1998 to 8.8% at 30 June 2003. As at 30 June 2003 the lowest and highest interest rates for overdrafts were 9.75% and 11.65% respectively.

A significant widening of spreads occurred in the period from late 1998 to early 1999.

In June 2003, Irish personal overdraft and personal loan average interest rates of 10.8% 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 respectively16.

The average interest rate charged on personal loans and overdrafts by the various market participants in the period 1 January 1998 to 30 June 2003 are set out in Tables 7 and 8 below. In this period the average official rate was 3.85%.

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17

Institution Average interest rate Spread over

average official rate

Irish Permanent plc 10.699% 6.848%

Ulster Bank Ireland Limited 11.181% 7.330%

National Irish Bank Limited 11.199% 7.348%

Allied Irish Banks plc 11.315% 7.464%

ACC Bank plc 11.319% 7.468%

Permanent TSB 11.472% 7.621%

Bank of Ireland 11.709% 7.858%

Average interest rate and average spread on personal overdrafts. 1 January 1998 to 30 June 2003.

TABLE 8

Institution Average interest rate Spread over

average official rate

First Active plc 8.952% 5.101%

Ulster Bank Ireland Limited 9.567% 5.716%

Bank of Ireland 10.732% 6.881%

ACC Bank plc 10.817% 6.966%

Permanent TSB 10.924% 7.073%

Allied Irish Banks plc 10.928% 7.077%

National Irish Bank Limited 11.072% 7.221%

Irish Permanent plc 11.95% 8.099%

Average interest rate and average spread on personal loans. 1 January 1998 to 30 June 2003.

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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

4 5 6 7 8 9 10 11 12

Average Cost

to Consumer Average Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Personal Overdrafts

4 5 6 7 8 9 10 11 12 13

Average Cost

to Consumer Average Spread

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19

17 Five years or less.

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 30 June 2003, the lowest and highest interest rates for small business overdrafts were 7% and 9.25% respectively and 4.75% and 8.5% 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 30 June 2003 are set out in Tables 9 and 10 below. In this period the average official rate was 3.85%.

Institution Average interest rate Spread over average

official rate

Bank of Scotland (Ireland) Limited 6.900% 3.049%

ACC Bank plc 8.679% 4.828%

National Irish Bank Limited 9.249% 5.398%

Ulster Bank Ireland Limited 9.349% 5.498%

Allied Irish Banks plc 9.373% 5.522%

Permanent TSB 9.444% 5.593%

Bank of Ireland 9.528% 5.677%

Average interest rate and average spread on small business overdrafts. 1 January 1998 to 30 June 2003.

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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 30 June 2003 were 8.28% and 7.32% respectively, while the averages in the euro area generally were 5.68% and 4.4%.

Institution Average interest rate Spread over average

official rate

Bank of Ireland 8.293% 4.442%

Ulster Bank Ireland Limited 8.373% 4.522%

National Irish Bank Limited 8.411% 4.560%

ACC Bank plc 8.771% 4.920%

Permanent TSB 9.005% 5.154%

Allied Irish Banks plc 9.948% 6.097%

Average interest rate and average spread on small business loans. 1 January 1998 to 30 June 2003.

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21

Small Business Overdrafts

3 4 5 6 7 8 9 10 11

Average Cost

to Consumer Average Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Average Small Business Loans

3 4 5 6 7 8 9 10 11

Average Cost

to Consumer Average Spread

Average Small Business Loans

10 11

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

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:

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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 2001 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.

DEMAND DEPOSITS (PERSONAL)

There were 13 financial institutions active in the market for demand deposits of less than €5,000 in the study period18.

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 5.02% in October 1998, to the lowest spread of 1.67% in June 2003, at a time when the average demand deposit rate was 0.33%) 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 30 June 2003, the lowest and highest demand deposit rates were 0.02% and 1.85%, respectively.

The average interest rate paid on personal demand deposits by the various market participants in the period 1 January 1998 to 30 June 2003 are set out in Table 11 below. In this period the average official rate was 3.851%.

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23

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.

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 30 June 2003 was 0.33%(see graph below), while that paid in the euro area generally was 0.76%.

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.

Institution Average interest rate Spread between average interest

rate and average official rate

Northern Rock plc 4.19% 0.206%(over the average official rate)19

ACC Bank plc .822% 3.029%

EBS Building Society .784% 3.067%

Ulster Bank Ireland Limited .722% 3.129%

Allied Irish Banks plc .589% 3.262%

Anglo Irish Bank Corporation plc .571% 3.280%

Permanent TSB .563% 3.288%

ICS Building Society .446% 3.405%

Irish Permanent plc .434% 3.417%

National Irish Bank Limited .386% 3.465%

Irish Nationwide Building Society .371% 3.480%

Bank of Ireland .368% 3.483%

First Active plc .265% 3.586%

Average interest rate and average spread on personal demand deposits. 1 January 1998 to 30 June 2003.

TABLE 11

Demand Deposits

0 1 2 3 4 5 6

Average Rate Paid

to Consumer Average Spread

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20 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.

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.

Date Financial Institution

05.11.99 7 27 17 17

04.02.00 8

01.09.00 17

11.05.01 4 14 21 5 13 21 28 21 10

06.12.02 14 10 26

07.03.03 5 25 11 5 14 11

Speed of pass through on personal demand deposits < €5,000

TABLE 12

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

20

Permanent

TSB

Irish P

ermanent plc

Ulster Bank Ireland Limited

RA

TE

INCREASES

RA

TE

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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:

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 0

Allied Irish Banks plc 0

Anglo Irish Bank Corporation plc 0

First Active plc 0

Irish Nationwide Building Society 0

Irish Permanent plc 0

National Irish Bank Limited 0

Permanent TSB 0

Demand Deposits of €5,000 or less - number of official rate increases passed on within 31 days.

TABLE 13

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 0

Irish Nationwide Building Society 0

National Irish Bank Limited 0

Demand Deposits of €5,000 or less - number of official rate decreases passed on within 31 days.

(26)

ONE-MONTH NOTICE DEPOSITS

(PERSONAL)

There were 13 financial institutions active in the 30 day notice deposits of greater than €20,000 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 1.02% at 30 June 2003. The average interest rate for one-month notice deposits at 30 June 2003 was 0.98%. 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 30 June 2003 were nil and 3.5% respectively.

The average interest rate paid on personal one-month notice deposits by the various market participants in the period 1 January 1998 to 30 June 2003 are set out in Table 15 below. In this period the average official rate was 3.85%.

Institution Average interest rate Spread between average

interest rate and average official rate

Northern Rock plc 3.824% 0.027%

Irish Nationwide Building Society 3.181% 0.670% Anglo Irish Bank Corporation plc 2.846% 1.005%

ICS Building Society 2.836% 1.015%

Allied Irish Bank plc 2.562% 1.289%

Bank of Scotland (Ireland) Limited 2.331% 1.520%

Ulster Bank Ireland Limited 2.081% 1.770%

EBS Building Society 1.889% 1.962%

Permanent TSB 1.719% 2.132%

First Active plc 1.659% 2.192%

ACC Bank plc 1.659% 2.192%

Irish Permanent plc .922% 2.929%

National Irish Bank Limited .903% 2.948%

Average interest rate and average spread on one-month notice deposits. 1 January 1998 to 30 June 2003.

(27)

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 30 June 2003 was 0.98%, while that paid on notice deposits of up to three months notice in the euro-area generally was 2.23%.

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.

One-Month Notice Deposits (Personal)

0 0.5

1 1.5

2 2.5

3 3.5

4

Average Rate Paid

to Consumer Average Spread

(28)

21 Bank of Ireland advised that deposit business in this category

is referred to their associated company ICS Building Society.

22Note: Northern Rock offered one-month deposit products in the

Irish market from 14 November 2001.

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.

Date Financial Institution

05.11.99 31 26 27 26 17

04.02.00 3 26

01.09.00 5 0 5 10

11.05.01 5 21 6 25 6 28 21 10

06.12.02 14 10 27 27 26 27 27

07.03.03 13 5 25 11 26 25 25 11

Speed of pass through on One-Month Notice Deposits> €20,000

TABLE 16

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 P

ermanent

plc

Ulster Bank Ireland limited

RA

TE

INCREASES

RA

TE

(29)

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:

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 0

Allied Irish Banks plc 0

First Active plc 0

Irish Nationwide Building Society 0

National Irish Bank Limited 0

Northern Rock plc 0

Permanent TSB 0

One-month notice deposits >€20,000 - number of official rate increases passed on within 31 days.

TABLE 17

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 0

Northern Rock plc 0

One-month notice deposits > €20,000 - number of official rate decreases passed on within 31 days.

(30)
(31)

31

ACC Bank plc

Lending Products

0 2 4 6 8 10 12 14 16

Average Credit

Card Spread Average AALoan Spread Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

0 1 2 3 4

Average Demand

Deposit Spread Average One-MonthNotice Deposit Spread

(32)

Allied Irish Banks plc

Lending Products

0 5 10 15 20 25

Average Credit

Card Spread Average AALoan Spread Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 0 1 2 3 4 5 6

Average Demand

Deposit Spread Average One-Month Notice Deposit Spread

(33)

33

Anglo Irish Bank Corporation plc

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand

(34)

Bank of Ireland

Lending Products

0 5 10 15 20 25

Average Credit

Card Spread Average AALoan Spread Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

0 1 2 3 4 5 6

Average Demand Deposit Spread

(35)

35

Bank of Scotland

Lending Products

0 2 4 6 8 10

Variable Mortgage Rate

(36)

Bank of Scotland (Ireland) Limited

Deposit Products

0 1 2 3 4

Average One-Month

Notice Deposit Spread Average DemandDeposit Spread

(37)

37

EBS Building Society

Lending Products

0 5 10 15 20 25

Average Variable

Mortgage Rate Spread Average CreditCard Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

0 1 2 3 4 5

Average Demand

Deposit Spread Average One-MonthNotice Deposit Spread

(38)

First Active Plc

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Lending Products

0 2 4 6 8 10

Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

-1 -2 0 1 2 3 4 5 6 7

Deposit Products

Average Demand

Deposit Spread

Average One-hMonth Notice Deposit Spread

(39)

39

ICS Building Society

Lending Products

0 5 10 15 20 25

Average Variable Mortgage Rate Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand

Deposit Spread Average One-Month Notice Deposit Spread

(40)

IIB Bank Limited

Lending Products

0 5 10 15 20 25

Average Variable Mortgage Rate Spread

(41)

41

Irish Permanent plc

Lending Products

0 5 10 15 20 25

Average Personal Loan Spread Average Variable

Mortgage Rate Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand Deposit Spread

Average One-Month Notice Deposit Spread

(42)

Permanent TSB

Lending Products

0 5 10 15 20 25

Average Credit

Card Spread Average AALoan Spread Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand Deposit Spread

Average One-Month Notice Deposit Spread

(43)

43

Irish Nationwide Building Society

Lending Products

0 5 10 15 20 25

Average Variable Mortgage Rate Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand

Deposit Spread Average One-Month Notice Deposit Spread

(44)

MBNA Europe Bank Limited

Lending Products

0 5 10 15 20 25

Average Credit Card Spread

(45)

45

National Irish Bank Limited

Lending Products

0 5 10 15 20 25

Average Credit

Card Spread Average AALoan Spread Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand Deposit Spread

Average One-Month Notice Deposit Spread

(46)

Northern Rock Plc

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand

Deposit Spread Average One-Month Notice Deposit Spread

(47)

47

Ulster Bank Ireland Limited

Lending Products

0 5 10 15 20 25

Average Credit

Card Spread Average AALoan Spread Average Variable

Mortgage Rate Spread Average PersonalLoan Spread

01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003

Deposit Products

-1 -2 0 1 2 3 4 5 6

Average Demand

Deposit Spread Average One-Month Notice Deposit Spread

(48)

6-8 College Green, Dublin 2, Ireland

T +353 1 410 4000 Consumer help-line lo call 1890 77 77 77

Register of Financial Service Providers help-line lo call 1890 20 04 69

F +353 1 410 4900 www.financialregulator.ie www.itsyourmoney.ie

Information Centre: 6-8 College Green, Dublin 2

References

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