Bad time to suggest London as Ulster Bank's regulator

Sources close to the bank have stressed this shouldn’t be interpreted as a precursor to an exit from the Irish market

THERE IS one story that captured the tunnel-visioned ambition of vilified former Royal Bank of Scotland chief executive Fred Goodwin for Ulster Bank back when Ireland was a good place to have a bank.

Goodwin was on one of his trips to visit Ulster Bank in the mid-Noughties when he spoke to staff at a town hall-type meeting explaining the bank’s “Journey to One” strategy to become Ireland’s biggest bank.

The speech was meant to rally the troops but Goodwin wasn’t an inspirational speaker. He was a details and brand man, more interested in cost-income ratio targets and ensuring the colour of the carpets at Ulster Bank matched those elsewhere in the rapidly growing RBS group.

Asked by a young female staffer what were the two greatest challenges to the strategy to become the number one bank in Ireland, Goodwin replied tersely, “AIB and Bank of Ireland”, and moved on to the next question.

The banking crisis and the recent computer crash at Ulster Bank have exposed the testing relationship between the Irish bank and its majority state-owned UK parent bank.

Goodwin is long gone and RBS has been left to manage the clean-up of a bank that has absorbed €12 billion of British public funds to cover heavy bad debts on property lending, a sum of money that RBS chief Stephen Hester admitted earlier this year was “too much”.

The computer meltdown also exposed Ulster Bank’s place in the pecking order within RBS, even though the bank stressed that the order of processing transactions was solely a result of technical reasons.

The priority of transactions run at the RBS processing facility in Edinburgh reflected Ulster Bank’s position as a small player in a large banking group – the NatWest and RBS transactions had to be processed first, simply because there was a greater number of them.

No other Irish bank has faced the triple whammy of heavy loan losses, a broken model where the bank is paying more for its money than it is charging customers on certain loans and a brand badly damaged by a month of technical disturbance that will end its relationship with many affected customers.

The offer of “tens of millions of euro” in compensation by Ulster Bank chief executive Jim Brown may not be enough to retain customers whose confidence in banking was shot long before this debacle.

News then that the bank is trying to switch the regulation of its business from Dublin to London could not have come at a worse time, particularly when the Irish regulator, the Central Bank, has been drawn into the public and political criticism for not doing more about the bank’s technological breakdown.

RBS wants the change as it will allow Ulster Bank to be funded without forcing the UK parent to set aside further capital for this support under new solvency rules for banks and will reduce its capital bill in Ireland.

The bank will still be regulated for conduct of business in Ireland, but converting Ulster Bank from a subsidiary to a branch of RBS could free up capital, allowing Ulster Bank to be a stronger third force against the two big domestic banks, Bank of Ireland and AIB.

This kind of structure isn’t new in Irish banking. National Irish Bank has been run as a branch of Danish bank Danske since 2007 and is monitored by Denmark’s regulator.

It would, however, be unusual for an Irish retail bank the size of Ulster Bank – it is the third-largest full-service bank operating in Ireland – to be regulated from London.

Sources close to the bank have stressed this should not be interpreted as a precursor to an exit from the Irish market. The UK bank has consistently said the 176-year-old Ulster Bank is a “core” part, but even if RBS wanted to, it couldn’t pull out of Ireland overnight.

Ulster Bank has €18 billion of loans in a so- called “non-core” unit – more than what is to be moved into Permanent TSB’s own in-house bad bank – and they will take years to work out. There is a further €24 billion of mortgages, many tied to loss-making tracker rates that customers will be reluctant to give up.

Once the clean-up is complete and the economy has improved, it is hard to see how RBS would not consider selling Ulster Bank if there was a buyer offering the right price.

There is plenty of road to travel before then but recent developments raise the question of whether a “Journey to Run” strategy for its Irish bank may be a better option for RBS.

Replacing the Irish regulator with the UK regulator in a bid to reduce costs could actually be another reason to stay in Ireland.