According to Michael Quirke, AIB's Head of Mortgage Products:
"Funding availability on wholesale money markets for Irish financial institutions remains difficult. Unfortunately, we have little choice but to introduce this pricing change, which is a measured response to the significant challenges which must be overcome if we are to achieve an economic return on our loan book and thereby return to a sustainable business model".
Brendan Nevin, BoI's Director of Consumer Lending, explains the reasons behind the increases:
"As a result of this, our current mortgage pricing is unsustainable.
"While any increase is regrettable, we have no choice but to make this move to ensure we remain open for business and continue to support our customers and the Irish economy going forward."
On the face of it, to the uninformed majority of borrowers, it might seem like Mr. Nevin is telling the truth. We'll ignore for the moment the fact that banks can borrow from the European Central Bank at 1% and charge 3.49% for mortgages. Banks also need depositor funds so that they can leverage new loans into existence. Let's say that they pay these depositors 5% interest on their savings. They would appear to be losing 1.51% if they then only charge 3.49% for mortgages.
But that is certainly not the case, not by a country mile.
Through the fraudulence of Fractional Reserve Lending, banks can create 10 to 12 times or more of new money based on customer deposits. According to the Bank for International Settlements (BIS) they must keep on hand a minimum reserve of 8% of deposits in case some customers want to withdraw their cash. The balance they regard as 'excess reserves' and can be used to create new money as loans.
For example, a customer deposits ぎ10,000. The bank holds ぎ800 in reserve and can lend out ぎ9,200. This is newly created money and exists alongside the original ぎ10,000 which is still in the customer's account. When the new ぎ9,200 is deposited in the same bank, or any other bank, the bank holds 8% of that in reserve and can create a further ぎ8,464 of new money. This can go on and on until some ぎ125,000 of new money is created. And the original depositor still has ぎ10,000 in his account.
So, if the bank paid their ぎ10,000 depositor 5% interest, it would cost them ぎ500. If they only loaned out ぎ10,000 at 3.49% they would just earn ぎ349, a loss of ぎ151. This is what the weeping and hand-wringing BoI (and all banks) want the public to believe. But through the leverage of Fractional Reserve Lending the bank can expand its interest percentage to 43.63% of customer deposits which means they actually earn ぎ4,362.50, giving them a grotesque net profit of ぎ3,862.50 on the original ぎ10,000.
What is the solution?
There are a number of solutions. One of them is explained in the next article, "Irish Government To Auction National Assets: Criminal Stupidity Or National Sabotage?"