Independent senator Feargal Quinn is planning to introduce a bill empowering the Central Bank to regulate some retail interest rates, specifically the rate on so-called variable rate mortgages.

In recent years, those fortunate enough to have borrowed at tracker rates during the bubble have been compensated for their negative equity experience with low borrowing costs. Tracker rates are as low as 1%, while those on variable rates are paying 4% and more. The banks are losing money on tracker mortgages – they took a bet that they would be able to fund at rates reflecting the (effectively zero) official ECB rate, and lent at an apparently adequate margin over this rate. They have lost the bet, one of many mistakes. They cannot fund below the rate they are receiving from tracker borrowers and so are stuck with a serious and continuing drag on profits. This has nothing to do with arrears and defaults – they are losing money even on up-to-date tracker customers.

With the indulgence of the Central Bank of Ireland, they have found a solution to this profitability problem. The solution is to jack up the lending rates they can actually control, particularly the rate charged to variable-rate mortgage-holders, as well as other lending rates to personal and business borrowers. There is now very little real competition in Irish banking, since so many banks have disappeared from the market and those that survive are blessed with captive customers, particularly long-term debtors such as variable-rate mortgage-holders. With large numbers of people paying as much as 3% more interest on up-to-date mortgages than those holding trackers, there is a natural sense of injustice and widespread public support for government action. Needless to say, there is no sympathy for the banks, authors of the credit bubble whose costs have been borne by shareholders, taxpayers and now by captive customers.

The problem is complicated by the Government’s decision to nationalise some, but not all, of the banks. The Government owns most of AIB and Irish Permanent, but only a modest minority stake in Bank of Ireland. It owns no shares in Ulster Bank, ultimately a ward of the UK Treasury since its parent, Royal Bank of Scotland, had to be rescued by UK taxpayers.

Should the government decide to screw the banks on variable rates, it would be screwing itself, since it hopes to sell the bank shares in due course and has already sold some shares in both Bank of Ireland and Irish Permanent.

The value of the remaining shares would be diluted, perhaps severely, if lending rates were to be forced down. If the Government owned all of the banks, or none, things would be more straightforward.

There are good reasons for fearing direct political determination of interest rates. Until about 1990, there was an officially-sanctioned interest rate agreement in Ireland, with the main banks setting identical deposit and lending rates under the gaze of the Central Bank. At one time, the banks even had the right to nominate Central Bank directors. The danger of political price-fixing in any area of business is that populist politicians, and we seem to have no other kind in any of the parties, cannot help themselves when given the opportunity to play with other people’s money.

I rather imagine that Feargal Quinn, when he was running the Superquinn grocery chain, would have had reservations about politicians fixing the price of bread. Keeping the lid on price-gouging is the task of competitors, not the role of politicians. But there was, and still is, lively competition among supermarkets, and Feargal Quinn did not have captive customers in the grocery business.

Until such time as some semblance of competition returns to retail banking, there is a case for intervention if it can be shown that accidental market power is being abused.

There is at least an a priori case that this is now happening and it would be a good idea to ask the Competition Authority to investigate the setting of interest rates in the mortgage market.

Since large numbers of variable-rate mortgage-holders are up to date with payments, it is open to new lenders to enter the market and offer them a better deal. There is a switching code in place and some competitive pressure would normally be expected. But there seems little sign of it and one of the reasons is the progressive erosion of lender security in the mortgage market. The public clamour for lower lending rates needs to be seen against the background of resistance to repossession by banks. If mortgage lending comes to be seen as unsecured, the interest rate will not be 4% but double that, or more. Rather than capping lending rates, the government should reflect on the failure of competitive forces to re-emerge.