As Minister for Finance Paschal Donohoe rushes to complete unfinished business before swapping jobs with the Minister for Public Expenditure Michael McGrath in three weeks’ time, a new item has dropped on to his desk — the outcome of the review he ordered into Irish retail banking 12 months ago.
“The report has been submitted to the Minister for consideration,” a spokesman for Donohoe told The Irish Times this week, declining to comment on the contents and recommendations. “It is expected he will bring it to Cabinet in the coming weeks.”
The plan is to publish the report — which is looking into everything from access to cash to banker pay caps, competition, and the future of the industry levy — afterwards, he confirmed.
“The report represents an opportunity for the Government to reset the State and the public’s relationship with the retail banking sector and to set out a vision for inclusive retail banking services,” said Labour Party finance spokesman Ged Nash, claiming the Government’s only banking policy is to sell on shares in banks that taxpayers were forced to bail out during the financial crisis.
Will the report be another dust collector? Its genesis, and the fact that the commissioner of the work is moving on, do not bode well.
After months of pushing back against the idea of taking part in a forum on the future of Irish banking in the wake of announcements in early 2021 that Ulster Bank and KBC Bank Ireland were quitting the market, Donohoe conceded in July last year by agreeing to oversee a “broad-ranging review” of a sector that had long been dogged by ultra-low interest rates, high capital demands, low demand for credit, and an influx of fintechs and non-banks vying for parts of their business.
Much has changed since Donohoe directed his officials to start the review. The outlook for the remaining Irish banks’ earnings has improved dramatically since the European Central Bank started to hike official interest rates in July for the first time in a decade, and as AIB, Bank of Ireland and Permanent TSB (PTSB) has secured approval from competition authorities to carve up most of the loans of the exiting banks between them.
Meanwhile, hundreds of thousands of customers of Ulster Bank and KBC are being forced to move current and deposit accounts, creating massive headaches for customers and remaining service providers alike.
But much remains the same. The European Commission highlighted in a report published this week — on how the Republic is faring nine years after exiting an international bailout — that Irish banks continue to be required to hold high levels of expensive capital in reserve against their loans, as a result of the perceived risks attached to Irish loans due to the scale of the domestic financial crisis.
“While average risk weights on loans have declined over recent years, they are still significantly above European averages,” the commission said, adding that the higher capital requirements and above-average running costs of Irish banks are seen as a partial explanation of why Irish interest rates have long been higher than the EU norm.
ACCESS TO CASH
Although Irish banks have been reining in costs over the past decade amid job cuts and branch closures, AIB’s short-lived plan during the summer to turn 70 branches into cashless outlets — abandoned within days amid customer and political uproar — has restoked a debate about future access to cash, even as the pandemic has accelerated the use of digital payments globally.
AIB chief executive Colin Hunt subsequently conceded that the bank had failed to “recognise and appreciate the importance of cash for a number of our customers” and that the lesson “is that you can’t get too far ahead of your customers”.
There will be just over 500 bank branches in the State, including AIB’s EBS unit, when Ulster and KBC finally close shop. That’s down from almost 1,050 in 2008, when a host of other lenders, including Danske Bank, Bank of Scotland and Irish Nationwide Building Society were in the market.
Although the main banks have outsourcing arrangements with An Post to facilitate over-the-counter lodgement and withdrawal services, three-quarters of ATMs in the Republic are now owned by unregulated cash distribution companies, like Brinks and Euronet, following disposals of much of the banks’ in-house portfolio of machines in recent years.
“We know that change is afoot,” said John O’Connell, general secretary of the Financial Services Union (FSU) and one of the first to call for a banking forum last year after Ulster and KBC decided to quit, “but it is how it is handled in future that’s important. The AIB cashless branches debacle is a clear example of how not to do it.”
The Central Bank said in its submission to the banking review that there is a need for a “wider social policy discussion” on cash access. It comes at a time when the UK government is pushing through legislation that would give oversight of that country’s cash network to the Financial Conduct Authority, meaning branches cannot close in communities if there are no alternative methods to withdraw or deposit money.
Elsewhere, the Swedish government enacted a law last year obliging credit institutions to offer, either directly or through agents, reasonable access to cash services with sufficient regional coverage throughout the country.
The Department of Finance is assessing, as part of the review, whether the Government here should introduce measures to protect access to cash and provide for the regulation of providers of ATM services.
“The maintenance of branch networks are important commercial decisions for banks. But bank branches also form an important part of local communities,” the Central Bank highlighted in its submission. “How should the potential tensions in this regard be resolved?”
It added: “What actions can be taken to ensure acceptance of cash across the economy during transition – as consumers can face cash-only or card-only payment situations day to day?”
PAY CAPS
While a Donohoe-commissioned report on bankers’ pay is known to have called for an easing of pay restrictions and an effective ban on bonuses across bailed-out banks in mid-2019, this has been gathering dust ever since.
However, the latest department review has come at the thorny topic afresh, asking interested parties for their views on the matter. Banking & Payments Federation Ireland (BPFI), the industry lobby group, called in its submission for a “normalisation” of pay conditions, arguing that the restrictions had also led to rising attrition rates for tech and other staff.
“In addition to challenges faced by retail banks in terms of staff leaving, it is increasingly becoming more difficult to recruit new staff. For example, indicative data from executive search firms show that talent pool is sometimes reduced by up to 50 per cent, mainly due to lack of a normal remuneration environment,” said the BPFI, which is led by former Fine Gael minister Brian Hayes.
“Reported job offer refusal rates are around 15 per cent to 20 per cent. Interestingly, latest trends show that job offer refusals are increasing at entry-level positions. Some of the cited reasons are lack of variable pay and lack of benefits such as subsidised healthcare.”
'We have a fundamental misunderstanding of our housing need.'
O’Connell at the FSU said that, while the €500,000 pay cap and lack of variable pay for senior banking executives routinely grab headlines, more than 20,000 employees are affected by the banks’ inability to offer profit-sharing arrangements, which are common across the EU banking sector.
But while the State sold its remaining shares in Bank of Ireland in September and is on track to reduce its holding in AIB to below 50 per cent by the middle of next year, there appears to be little political appetite in Government to lift the remuneration restrictions.
COMPETITION
The Competition and Consumer Protection Commission (CCPC) used its submission to the review to call for a more efficient use of suspended repossession orders by courts to resolve deep-in-arrears mortgage cases that have gone down the litigation route — noting that the difficulties banks face in enforcing security on a mortgage debt “have been cited as a potential barrier” for new entrants into the market.
The authority noted that there is a long-standing practice in the UK to use suspended repossession orders at an early stage of court proceedings, subject to borrowers complying with conditions set out in an order relating to payment of any sum secured by the mortgage or the remedy of any default.
Irish laws introduced in 2009 allowed courts to issue suspended repossession orders. However, the CCPC noted that Irish courts tend to adjourn proceedings in the expectation that borrowers and lenders would agree to some form of settlement — rather than reaching a court-mandated solution as part of a suspension.
As of the end of last year, more than a third of the 6,257 problem owner-occupier home loans that were part of the legal process had been stuck in the system for more than five years, according to Central Bank data, even as overall arrears levels have fallen sharply over the past decade.
More than half of the 27,000 mortgage accounts in long-term arrears as of the end of 2021 made no payments towards their home loans in the past two years, according to the Central Bank.
Non-bank lenders such as ICS Mortgages, Finance Ireland and Avant Money have entered the Irish mortgage market in the past four years, helping to drive down average new home loan rates in the market as they built up a 13 per cent share of new lending by the end of 2021. However, the European Commission report this week highlighted that the competitiveness of the non-banks is under threat, given that they raise their funding in the wholesale markets, where borrowing costs have jumped this year amid speculation on how far the ECB will go with rate hikes.
The three non-bank mortgage lenders have been more active than the mainstream banks at increasing mortgage rates in recent times. “Since banks keep paying low interest on deposits, their main source of funding, they have not felt pressure to increase their lending rates [at the same pace],” the commission said.
Meanwhile, Brendan Burgess, a consumer advocate and founder of Askaboutmoney.com, said that if Irish policymakers had any interest in protecting mortgage borrowers, they would ban “dual pricing” in the market. This is a practice where lenders offer lower variable rates to new customers compared to existing borrowers. Home loans with cashback offers, which may cost more in the long run, should also be outlawed, he said.
BANKING LEVY
While there are no signs that department officials are looking into Burgess’s requests, Donohoe has committed to reviewing the future of a banking levy that has been in place since 2014, after the banking review report is published.
Then finance minister Michael Noonan brought in the levy initially for two years, but it has since been extended on several occasions.
Donohoe said, as he announced Budget 2023 in late September, that he was continuing the charge — which is generating about €87 million a year from AIB, Bank of Ireland and PTSB — until the end of next year.
BANKER ACCOUNTABILITY
The upcoming publishing of the banking review comes at a time when the Government is pushing a Bill through the Oireachtas that would enshrine basic conduct standards for financial services firms in law and make it easier for regulators to hold senior financial executives to account for failings under their watch.
The new senior executive accountability regime (Sear) is expected to be in place by the end of the next year and has been heralded in parts as a game-changer in the push to improve the culture of the Irish financial services sector.
O’Connell at the FSU is more circumspect. “While the planned regime is to be welcomed, I’m concerned that there is a view that Sear is the answer to most of the problems in banking. It’s not,” he said. “There is a lot riding on the outcome of the banking review.”
