The background to the proposed sale of PTSB to the Austrian bank Bawag is an absence of competition in the Irish banking sector, made worse by exit of potential competitors after the 2008 economic crash. However, this lack of competition enabled the Government get a big price when they sold their bailout stakes in Bank of Ireland and AIB.
There’s a trade-off between seeking the best price for its PTSB shares, and grasping an opportunity to provide some real competition in Irish banking.
The collapse of the Irish banking system almost 20 years ago imposed a huge cost on Ireland, equivalent to around 50 per cent of national income. As a result, the then government had to seek the support of the IMF and our EU partners to keep the State afloat.
When the effects of the related recession are taken into account, the final cost exchequer was around 80 per cent of national income.
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It was not just the Irish taxpayer who lost out from the banking collapse in Ireland. The UK government also had to foot a large bill to bail out the British-owned Ulster Bank. Other foreign banks subsequently pulled out of Ireland, having lost a packet.
In resolving the crisis, Anglo Irish Bank and the Irish Nationwide Building Society were closed, and we are left today with only three big banks – more accurately 2½ – to service the needs of the economy.
[ Bawag may move PTSB into corporate and public-sector lendingOpens in new window ]
There is very limited competition between these three pillar banks – AIB, Bank of Ireland and PTSB. In undertaking the clean-up of Irish banking, it might have been cheaper for the Government to have rolled PTSB into one of the other two banks, but by keeping it as a separate entity it was hoped to ensure future competition.
A key factor in the lack of competition in Irish banking has been that the big three only really operate in Ireland. If any had been active in other EU markets, as part of a wider EU banking group for example, the outcome might have been different.
These Ireland-only banks have had lots of deposits, but too few people wanted to borrow from them.
The Irish company sector is dominated by foreign multinationals that are global in their operations and highly profitable. They have no need of money from Irish banks, sourcing their finance through other channels.
While Irish banks lend profitably to the rest of the company sector, this represents less than an eighth of their portfolio of assets, compared with over a fifth for other banks across the euro zone.
Lending to households by Irish banks is also only half the average level for banks in the rest of the euro zone. One of the factors restraining banks is the need to avoid a splurge of lending, creating a bubble in the property market, as happened in 2004-2008.
The lack of opportunities to lend in Ireland means that Irish banks hold more unprofitable cash than banks elsewhere. They also lend more to other banks across the euro zone, which have better opportunities to use the funds.
If Irish banks had been part of euro-wide consortiums instead, they could have made much better use of deposits by lending to companies and households in other jurisdictions. In turn, there might have been more competition in Ireland, in particular for deposits.
Over the last few years, deposit rates in Ireland for households have been significantly lower than elsewhere. And Irish households have not had the opportunity to easily shift their deposits to another euro zone bank.
Ireland’s lack of competition in banking is greatly aggravated by the fact that the banks are not fully integrated into the wider euro-zone banking system. It is not just households that have lost out from this isolation, but the banks themselves have not had access to the profitable opportunities elsewhere.
Hopefully the proposed sale of PTSB to a European bank will bring real competition to benefit Irish customers and create a healthier banking market. It is very much in Ireland’s interests to see completion of the EU single market for financial services.
Irish mortgage interest rates are also higher than elsewhere in the euro zone – by 0.5 percentage points today, but by 1.2 percentage points from 2014 to 2020.
That’s not just about less competition – a substantial part of the margin is because, compared with other countries, it is slow and difficult to repossess housing here in case of mortgage default. If homes are not effective collateral, mortgage lending becomes riskier and thus more expensive. The risk premium, alongside weak competition, meant Irish homebuyers paid €1.5 billion-€2 billion each year in additional interest following the financial crash.
