Irish banker pay cap poses ‘systemic risk’ for sector, lobby chief warns

Retention of talent cited as key issue as overseas lenders and fintech disrupt market

Ongoing pay restrictions across bailed-out Irish banks pose a new systemic risk for the sector, as lenders struggle to retain top managers and compete with overseas-owned financial institutions and technology groups for key staff, the industry’s top lobbyist warned on Wednesday.

Addressing the Banking & Payments Federation Ireland's (BPFI) annual retail banking conference in Dublin on Wednesday, the organisation's chief executive, Brian Hayes, said that stricter rules on capital reserves in the wake of the global financial crash were designed to avoid "the madness that happened" during the credit bubble being repeated.

“But I actually think there is a new systemic risk across the sector. It is around talent retention in leadership,” Mr Hayes said. “A business model . . . is predicated on having a senior management team there for a period of time to deliver on its plans to make sure that its model is credible to the market. We could face a systemic risk, potentially, because of the significant flight from Irish retail banking.”

Bank of Ireland chief executive Francesca McDonagh, who has been consistently critical about remuneration restrictions, last week became the latest top figure in the industry to announce she was quitting, after less than five years, to take up a senior position with Credit Suisse. It came after her former chief financial officer (CFO) Myles O'Grady left the business in March, after less than three years.

Struggling

Elsewhere, Permanent TSB (PTSB) has been searching for a permanent CFO since Eamonn Crowley was promoted from that role in mid-2020 to become the bank's chief executive. Banks also claim that they are struggling to hire and retain staff with high-in-demand IT and digital skills, which are necessary to meet evolving consumer and regulatory demands.

Rescued Irish banks have been subject to a general €500,000 cap on executive salaries and a prohibitive 89 per cent tax on bonuses since the financial crisis more than a decade ago. Still, Ms McDonagh has enjoyed a higher annual salary of €950,000 during her time with Bank of Ireland, largely as a result of the lender avoiding succumbing to State control following the crash.

Mr Hayes, a former junior finance minister and one-time member of the European Parliament, said that bankers need to understand that "centre-ground" political parties across Europe paid a very big price for the financial and economic crisis after the credit bubble burst, "in terms of trends in support for more extreme left and right parties".

However, he said that “political courage” is needed to ease the restrictions to “level the playing field”, especially as European authorities have overhauled remuneration guidelines following the crisis, including the introduction of clawback and malus clauses (a financial penalty incurred when an investment or deal results in a loss) to avoid rewarding bad behaviour.

“We can’t get our banks up to sustainable levels of profitability with one arm tied behind their backs,” he said.

Remuneration

Minister for Finance Paschal Donohoe did not bring up the thorny issue of remuneration when he addressed the conference about the scope of the retail banking review currently under way at his department.

The 12-month body of work started last November after Ulster Bank and KBC Bank Ireland announced they were exiting the market, as the sector grapples with ultra-low interest rates, high capital demands, muted loans demand, and an influx of fintechs and non-banks vying for parts of banks' business.

It will assess, among other things, operational challenges within Irish lenders’ business models and structural changes stemming from fintech and digital finance, which are disrupting the traditional banking model.

PTSB chief executive and BPFI president Mr Crowley said the Irish banking sector is at an “inflection point” as it deals with rapid IT advances, changing consumer preferences, extensive regulatory requirements and a crucial role in funding the transition to the green economy.

“We need to honestly ask why it is that two fully serviced international banks – that have for many decades worked in the retail market in Ireland – have decided to leave,” he said.

“An honest discussion about the landscape and environment for retailing banking in Ireland is important – a discussion that moves away from simple depictions and asks some hard questions.”

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