Minister should give up any role in bank mergers, says report

A review group established by the Minister for Finance, Mr McCreevy, has recommended that he should no longer have any role in sanctioning mergers and acquisitions in the banking sector.

With an increased prospect of mergers and acquisitions in the Republic, and in Europe generally, the exemption of licensed credit institutions from the Mergers, Takeovers and Monopolies (Control) Act should be removed, the group has concluded.

The section of the Central Bank Act 1989 which gives the Minister for Finance a role in the supervision of bank acquisitions should be scrapped, it said.

"Proposed mergers should be assessed by the Minister for Enterprise, Trade and Employment and, where appropriate, the Competition Authority, in consultation with the regulatory authority, to ensure compliance with competition laws and so that they are in the best interests of bank customers and the economy generally."

In its report, The Banking Sector: Some Strategic Issues, the group states that because of the relative efficiency of the major banks in the Republic, there may be little scope for cost reductions through takeovers.

The greatest scope for cost savings would be through a merger of the two main banks or a takeover of both by one purchaser. These options would provide scope for greater efficiency through the rationalisation of headquarters and branch structures.

"However, from a public policy viewpoint, given that the Irish retail banking market is relatively sheltered, the resulting concentration would currently, almost certainly, be assessed in the interests of the consumer," the report states. The group - comprising senior civil servants from the Department of Finance and the Central Bank - reported that banks may seek out mergers or acquisitions for diversification reasons rather than cost savings.

Up to 90 per cent of the Irish retail banking market may be held by the top five banks, according to the report. The European Central Bank classifies the Irish market as one of "medium concentration".

One of the major challenges facing Irish banking comes from technological change and the opportunity for new entrants to "cherry pick" new and existing customers willing to move away from the branch network. Four types of operators are likely to make use of the Internet to compete in the Irish market, according to the report. These are: existing Irish banks; Internet banks; established banks from other markets; and retailers from other sectors.

"The group recognised that this increase in competition is a welcome development and is likely to bring long-term benefits to bank customers and to the economy generally," the report states.

The group identified the key strategic issues for the next decade as: mergers and acquisitions; retail payments systems; and branch networks. It recommended that the Central Bank should carry out a full review of the organisation of the retail payments system. The group expressed the view that payments could be cleared more quickly than is currently the case.

In relation to the branch network, the group reported that as well as having significant public policy implications, the issue was also one where "long-term commercially viable solutions" need to be found.

Banks must ensure that "short-term expediency" does not lead to the permanent withdrawal of services from certain areas, leading to the long-term loss of customers.

The group was established by Mr McCreevy last November to look at the strategic issues facing the banking sector. The Minister last night welcomed the report and said he would welcome any submissions made in response. After consultation, "I will proceed to recommend to Government any necessary legislative changes", he said.