Competition in banking is vital, but profits will have to return first
Reform is unlikely at banks on life support but plans must be made for the future
There were, for many years, stories and rumours about one of the big foreign players buying either AIB or Bank of Ireland.
At the turn of the last century, at the behest of the then minister for finance Charlie McCreevy, several reports were produced into the state of the Irish banking industry. The Department of Finance itself produced a major study, published in 2000, which noted: “More than 80 credit institutions offer banking services in Ireland, of which 11 have a significant involvement in retail banking by operating branch networks.”
It was a much happier time, one that enabled the authorities to conclude that there was a “medium” level of concentration (a measure of competitiveness). The main threat – from a consumer’s point of view at least – to a healthily competitive finance industry were seen to be likely mergers and acquisitions (M&A) activity by the banks.
Understandably, no consideration was given to the possibility that the many foreign banks present in Ireland would simply pack their bags and go home.
There have always been two sources of potential M&A activity, the consequences of which have concerned the authorities. First, there were, for many years, stories and rumours about one of the big foreign players buying either AIB or Bank of Ireland.
Official concern became wishful thinking during the financial crisis: before the full extent of the losses became known, there were wild hopes expressed that at least one of the problem banks would fall into the hands of a foreign “white knight”.
Second, there is the long mooted merger of AIB and Bank of Ireland. Even the 2000 Department of Finance report acknowledged that it made some sense from a cost savings point of view but would, of course, present competitiveness issues.
It could be on next year’s economics Leaving Cert exam: given that the State is a majority shareholder in the Irish banking system, should we care about the state of competition in that industry?
If the banks are able to extract monopoly profits from their customers, does it matter, given that we, the people of Ireland, own those profits? After all, while some of us are bank customers, all of us are shareholders.
The answer, of course, is that we all lose from the behaviour of monopolies. Yes, we might get some payback from our claim on the excess returns being earned by the banks but there are, almost certainly, losses to society as a whole from all of this – losses that are gone forever.
Some people have argued that our home-grown financial crisis was caused by “too much competition”: when one bank dived into stupid lending practices, others had to follow for reasons of “competitiveness”. That’s pure hokum in my view.