Cliff Taylor: To lose one bank is unfortunate; to lose two is careless
Why pull out of a market with some of Europe’s highest mortgage rates and fees?
KBC is following NatWest, Ulster Bank’s owner, out the door. And we are left with a semi-State banking sector. Photograph: Brian Lawless/PA Wire
So here’s the question. We have the second-highest mortgage rates in the euro zone, and personal and bank customers generally pay high fees and charges here. So how come another overseas-owned bank is now leaving the Irish market?
Don’t mind all the old guff about the possible sale of its assets – KBC is following NatWest, Ulster Bank’s owner, out the door. And we are left with a semi-State banking sector.
Another green bottle has fallen off the wall of Irish banks. We had 12 banks before the 2008 financial crash and soon we will have three. We have gone from an over-banked market which drove reckless lending to one where we have just two full-service players and one smaller one, Permanent TSB, which is an awfully long way from a third force.
Irish bank shares rose yesterday because investors reckon that less competition means higher profits. This will be in part because the remaining banks can now charge more.
The huge losses made during the financial crash and the resulting bad loans mean banks here face tougher supervision than in other euro zone markets
The Government has work to do here.The strategy to create a viable and competitive market out of the ruins of the banking crisis – slowly selling down the State’s shareholdings – has fallen asunder.
And we also need to hear more from the Central Bank. It has seemed strangely disengaged from public debate on the future of banking, perhaps burnt by criticism before the 2008 financial crash that it was too cosy with the banker. It has said little enough about why it believes Ulster Bank and KBC have left and how it sees the market developing from here.
Banks across the world are facing tough times due to rock bottom interest rates and the pandemic. More trouble may lie ahead from bad loans after the pandemic. But the Irish market clearly has its own unique problems.
So what is different here and why are interest rates high? Mario Draghi, then ECB president, put it succinctly to an Oireachtas committee in 2018. The Irish banking market was a “quasi-monopoly”, he said, and banks here had too many problem loans. Now we might say the market is a duopoly and the problem of bad loans remains.
The huge losses made during the financial crash and the resulting bad loans mean banks here face tougher supervision than in other euro zone markets. The capital rules under which banks operate oblige them to operate more cautiously here than banks in other euro zone markets. They also have to have more sources of funds that are not exposed to loan losses. This is designed to make the sector more resilient if trouble hits.
Bankers say this makes it more difficult to make a return in the Irish market. Ulster Bank said it had better uses for its capital and KBC has also complained about the rules. A study commissioned by lobby group the Banking and Payments Federation of Ireland (BPFI), argued that the rules for banks remained tougher here than elsewhere even though they take less risk on mortgage lending due to Central Bank rules.
It also pointed to the difficulty banks have here in repossessing homes when mortgages are in lengthy arrears. This means bad loans linger on bank loan books – and so the capital rules will remain tight.
The State, now the reluctant owner of a larger part of the banking sector, is inevitably pulling into the centre of the debate
Now we won’t solve these problems overnight. And until we have a better handle on the extent of the bad loan problem that will emerge after the pandemic, changing bank capital rules might not seem like a good idea.
But if there is a quasi-monopoly here, then competitors should be attracted to the Irish market to try to get a slice of the action. Instead they are pulling the shutters down on their operations here. And the State, with plenty of demands on its cash, is unlikely to want to invest billions to build up Permanent TSB into yet another State-owned player.
For customers the outlook is the worst of both worlds: less competition – bar some welcome cherry-picking from digital operations – and higher charges and fees. Switching accounts is still too difficult and cumbersome. Central Bank regulation does not appear to put a priority on boosting competition.
Ed Sibley, the Central Bank’s deputy governor, said following the KBC announcement that the bank understands concerns about a further reduction in competition in the market and less choice for consumers.
Competition issues are primarily a matter for the Competition and Consumer Protection Commission (CCPC), he said, though the Central Bank realises the need for the system to serve the needs of people and businesses, and this was central to its supervision and regulation.
But where to next? Does the Central Bank agree with the banks that the capital rules are imposing too high a burden? Or why does it believe that two middle-sized competitors have left the market, leaving only the domestic players? How does it believe competition can now be enhanced, either between existing players or with new entrants,most likely now to be digital players?
The CCPC will rule on the competition aspects of the deals now under discussion – but it is the Central Bank, together with the regulator in Frankfurt, which is drawing the lines on the pitch and setting the rules for how the sector operates.
And the State, now the reluctant owner of a larger part of the banking sector, is inevitably pulling into the centre of the debate. Where to next?
First it will be a question of navigating the banks out of the pandemic and the inevitable rise in bad loans, for which some provisions have been made. Beyond that, there are calls for a forum on the future of banking. It might be a talking shop, but could get some issues out on the table.
With KBC following Ulster out the door, the old Oscar Wilde saying seems appropriate: “To lose one may be regarded as a misfortune, to lose two looks like carelessness.”