ANALYSIS:Bank of Scotland Ireland didn't land us in the current crisis but it was a catalyst for it, writes DOMINIC COYLE

BANK OF Scotland’s brief reign as the enfant terrible of the Irish bank sector is over. Just over 10 years after it vowed to shake up the Irish mortgage market, it has itself become a victim of the reckless lending that ensued.

Among the losers will be small businesses, the bank’s original constituency when it entered the State’s financial services sector quietly in 1989 with the purchase of Equity Bank. While Bank of Ireland and Ulster Bank have both made noises over the weekend about pursuing that segment of Bank of Scotland Ireland’s (BOSI’s) business, it remains to be seen what that means in practice for businesses such as the troubled hotel sector.

The bank’s first decade in Ireland had given it the opportunity to assess the challenges and the opportunities of going head-to-head with the more established business players, especially in a mortgage market which was at the time especially profitable. A burgeoning property boom gave it the incentive to jump into this new market.

The market Bank of Scotland entered was a staid one, in which the same offerings from the same players had been a feature for many years. The notion of competition was observed more in name than in reality. Innovation in retail banking, and especially the mortgage market, was notable by its absence.

Bank of Scotland changed all that. Abetted by European Central Bank (ECB) interest rates and government policy on property-related tax incentives, both of which were inappropriate for the Irish economy at that point, it triggered a mortgage extravaganza for which those of us left behind will spend years paying a heavy price.

Bank of Scotland was at the forefront of many new products in the Irish market. It launched the consumer-friendly concept of tracker mortgages, immediately undermining the profit margin of the sector. If Bank of Scotland could not have been expected to see how money market rates would rise so sharply against official ECB interest rates during the subsequent post-Lehman global financial crisis, locking banks into unprofitable long-term arrangements, it can have less excuse in certain other initiatives it championed.

Interest-only mortgages, 100 per cent mortgages and equity release served to fuel demand for residential property investment that looked overdone long before the inevitable bursting of the property bubble. Along with other banks, when repayment figures didn’t stack up, they started pushing out the terms. Loans of 35 and even 40 years became common. People were allowed to borrow money they effectively couldn’t afford to pay back at the outset, and certainly not in the face of any adversity.

BOSI was not responsible by itself for the years of reckless lending that have landed us in our current crisis, but was a catalyst for it.

Lloyds Banking Group, the UK group that took over the crippled HBOS operation, was always going to cast a sceptical eye on the Irish business, and its decision this week to close the doors on the bank was not unexpected. Lloyds had already retreated from the personal banking business here in February last, closing 44 Halifax branches less than five years after opening its first retail branch.

At that time, it revealed it was conducting a review of the balance of the Irish business. With up to half of the €33 billion Irish loan book in trouble, and little prospect of any strong return to growth in the medium term, the odds were always against survival. In terms of loan book, the business accounts for roughly 5 per cent of the overall Lloyds Banking Group. In any case, Lloyds has no real experience in the Irish market and has never expressed any great interest in it.

But the demise of BOSI does create a number of problems for the Irish banking system, its customers and its regulators.

Lloyds’ outlook for growth in the market in the medium term is discouraging; if prescient, it will exacerbate problems for local businesses and for the Government’s fiscal policy. For customers, especially small business, the departure further limits choice – and probably raises charges – in an already tight market.

But possibly the biggest problem is for our regulators. It seems increasingly apparent that in the post-crisis Irish banking landscape, the big two banks will have even greater dominance than they did before the “advent of competition”.

As taxpayers consider how to pay a bill of close to €30 billion to rescue banks deemed systemic, are we not running the risk of creating an even greater monster in the years ahead?