Ireland lays out potential penalties for bank overcharging

* Government threatens increased levy, shareholder action

* Irish Central Bank to probe bank culture and behaviour

* Five main retail banks outline compensation timeline (Adds details, finance minister, central bank quotes)

By Padraic Halpin

DUBLIN, Oct (Shenzhen: 000069.SZ - news) 25 (Reuters) - Ireland (Other OTC: IRLD - news) 's finance minister laid out a range of penalties the government could slap on the country's banks if they do not meet targets agreed on Wednesday to compensate thousands of mortgage customers who they overcharged.

A Central Bank investigation that began in 2015 found that 20,000 borrowers were likely to have been affected and that they should have been given the option of a cheaper mortgage.

The scandal has risen to the top of the political agenda after a number of customers gave evidence in parliament of the problems it caused them.

The government had already threatened to penalise the banks last week. Paschal Donohoe said these actions could include an increase in its annual bank levy, amending tax law, introducing stricter reporting or shareholder activist actions if insufficient progress on compensating customers was made by an initial deadline of mid-December.

"I hope not to have to pursue these options but if the central bank cannot indicate that the issues are resolved, these are actions that I will take," Donohoe told a news conference, adding that further work was needed by the banks to see if more customers were affected.

Donohoe also mandated the country's central bank to prepare a report on current bank culture and behaviour. The Central Bank said it shared the government's view that "significant and deep-rooted cultural issues" still existed in some banks.

Donohoe said he would not consider amending laws limiting pay in the sector until the issue was dealt with. These were introduced during a banking crisis a decade ago that required the largest state rescue in the euro zone.

The five main retail banks - majority state-owned Allied Irish Banks and permanent tsb, part state-owned Bank of Ireland (EUREX: 1269463.EX - news) and KBC Bank Ireland and RBS (LSE: RBS.L - news) ' Ulster Bank, laid out varying timetables on Wednesday detailing compensation plans at the behest of the government.

The central bank investigation has identified customers who should have been given the option of a cheaper "tracker" mortgage or kept on a better rate years ago. It ordered lenders to repay the difference and offer compensation.

Another 7,000 tracker mortgage customers received redress and compensation separately before the central bank stepped in and widened the probe throughout the sector.

Tracker mortgages, which follow the European Central Bank rate, were sold in Ireland prior to the financial crisis and have proven significantly cheaper than variable or fixed rate mortgages as ECB rates have long been at record lows.

This meant some customers were left paying hundreds of euros extra a month at the height of Ireland's financial crisis and one borrower told lawmakers earlier this month that he suffered a stroke and his wife had a nervous breakdown as a result. (Reporting by Padraic Halpin; Editing by Susan Fenton and Jane Merriman)