Pension savers pay the price for banks being uncompetitive

Cantillon: Bank of Ireland to levy a charge on cash reserves deposited by pension funds

Bank of Ireland has decided to levy a 0.65 per cent charge on cash reserves lodged by pension funds. The ECB deposit facility rate is currently 0.5 per cent. So the bank  is making a profit of 15 basis points.  Photograph: Frantzesco Kangaris/Bloomberg

Bank of Ireland has decided to levy a 0.65 per cent charge on cash reserves lodged by pension funds. The ECB deposit facility rate is currently 0.5 per cent. So the bank is making a profit of 15 basis points. Photograph: Frantzesco Kangaris/Bloomberg

Your Web Browser may be out of date. If you are using Internet Explorer 9, 10 or 11 our Audio player will not work properly.
For a better experience use Google Chrome, Firefox or Microsoft Edge.

 

Having money in cash is never good for pensions; it is the ultimate conservative play. The money is always losing value, just not much.

Ideally, that makes some sense only in the run-up to retirement when there is little time to recover from sharp falls in riskier assets, or when markets are so volatile that it becomes a temporary safe haven.

Not any more.

On one level, the decision by Bank of Ireland to levy a charge on cash reserves deposited by pension funds with it is hardly surprising. The European Central bank has been charging lenders across the euro zone since 2014 when they deposit money with it and the bank will argue that it is simply passing on the costs.

The bank argues it can no longer sustain that drain on its finances and is simply passing on the charge.

That raises two issues. First, the obvious: Bank of Ireland has decided to levy a 0.65 per cent charge: the ECB deposit facility rate is currently 0.5 per cent. So the bank is not simply recouping its costs, it is making a profit of 15 basis points by doing nothing.

And that brings us to the second issue. Banks have become very poor at lending money. The inability to lend is not just a recent phenomenon, a feature of the Covid-19 economic collapse. It has been an issue for Irish banks pretty much for the whole of the past decade.

In part, it is because banks have pivoted from making no assessment of risk at all before the financial crash to being cautious in the extreme since. Secondly, in a low interest rate environment, bank finance is not as attractive to corporates who can frequently borrow on bond markets at better rates. Put simply, they are not competitive.

And for that, this time around, pension savers will pay the price.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.