The Irish banking sector needs to be profitable to support a fast-growing economy, writes Pat Farrell.
The introduction of a new code designed to make it easier for customers to switch their financial services provider coincides with the recent report by the Competition Authority on competition in the banking sector in Ireland. The report inevitably attracted significant attention, given its remit and the importance of banking services to consumers and the economy.
Not all of the debate has been balanced, and this is hardly surprising given the traumatic year the sector has had. However, it is important that any analysis of the sector takes into account the continuing positive developments in banking competition and choice which have been occurring in the Irish market for quite some time.
The market for banking services in Ireland is competitive and is becoming more so every day.
Indeed, since the Competition Authority began its study almost two years ago, the process of consolidation and the entry of new players to the market have continued apace, culminating in the announcement of Danske Bank's acquisition of National Irish Bank on the very day the authority published its report.
Looking at the financial services market in Ireland from the consumer's perspective, it is best to start by focusing on the product which is currently top of everybody's agenda - the home mortgage.
The mortgage market here is one of the most competitive in Europe and, according to IFSRA, offers good value to Irish consumers when compared to the rest of the eurozone.
This is well illustrated by a study carried out on behalf of the banking sector in Ireland last year which showed that the cost of a mortgage in Ireland is the third cheapest of 13 European countries (see table).
The Competition Authority study claims that competition is not working well for consumers in two specific segments of the banking market: namely, the personal current account market and small business lending. However, it is necessary to look at the bigger picture before drawing definitive conclusions; and on a range of independent measures it can be clearly seen that competition in the market is healthy and continues to improve.
For example, a recent study by the Central Bank found that 94 per cent of the total credit extended to Irish households in the personal lending category is at rates that are below the eurozone average.
Independent research by Amárach Consulting shows that current account transaction charges for business customers in Ireland are significantly below those of the UK, our nearest competitor and single largest export market.
A separate study carried out last year found that the cost of a typical basket of Irish personal account transactions is the second cheapest of 12 European countries (when Irish Government stamp duty is excluded).
Finally, a series of consumer surveys by IFSRA on credit cards, personal loans and other financial products demonstrates the extent of customer choice and price competition to be seen in these markets.
Much of what has been identified by the Competition Authority as needing to be addressed in the personal current account market is already the subject of proactive industry change. The new Code of Practice on Account Switching is now in place, making the process of switching one's current account between service providers as quick, easy and hassle-free as possible.
This code has the potential to enhance customer choice and competition. I say potential because Government must also play its part in helping the consumer by abolishing stamp duty on cards and price control on charges, so removing two more important barriers to innovation and competition as identified by the Competition Authority's study.
It is difficult to have a debate about bank charges and interest rates without some negative reference being made to the levels of bank profitability. The Irish banking sector is profitable - it needs to be to enable its support of the purchase of homes and the development of businesses in this country.
Our analysis of data produced this year by the authoritative Financial Times-owned The Banker magazine shows that the Irish banking sector was the eighth most profitable of 23 developed countries. It also shows that Ireland is the fourth most efficient in terms of the average cost/income ratio. This confirms the correlation between profitability and efficiency.
Furthermore, the volume of business conducted by the banking sector reflects the fact that Ireland continues to uphold its status as one of Europe's fastest-growing economies. In such circumstances, it would almost be unforgivable for our banks to fail to produce the profits they continue to deliver.
It is an undisputed fact that banks in this economy must continue to deliver high levels of profitability to generate the levels of regulatory capital necessary to fund the borrowing requirements of both business and consumers in what is Europe's fastest-growing economy.
Employing over 52,500 people, an annual direct spend in the economy of at least €3.7 billion and an annual tax payment to Government of over €1.4 billion, the banking and financial services sector makes a hugely significant contribution to the Irish economy.
Such is the importance of the role played by the sector that at least two out of every 100 people employed here work in financial services. This is exceeded in the EU only by Luxembourg thanks to its long history in the sector.
Clearly, the financial services sector in Ireland has come a long way in terms of employment generation and innovation. That would not have been possible were it not for its competitiveness - nationally and internationally.
I do not mean to suggest that there is no scope for further improvement.
It is in our interests, those of our customers and our various other stakeholders to ensure that we constructively and rationally determine how the sector should evolve to ensure it delivers the best in terms of innovation, service and value to consumers while continuing to play a vital role in the development of the Irish economy.
Pat Farrell is chief executive officer of the Irish Bankers' Federation