Minister for Finance Paschal Donohoe said on Tuesday that he expected his officials to field and "consider" bank submissions on the impact of pay restrictions on bailed-out lenders as part of a long-awaited review of the future of Irish retail banking.
“I expect submissions will be made on that and they will be assessed and considered,” Mr Donohoe told reporters on Tuesday as he unveiled the terms of reference of a wide-ranging review, which will take 12 months to complete.
A Banking and Payments Federation Ireland (BPFI) report in September said the ongoing ban on variable pay among domestic banks was putting them at a "considerable and growing disadvantage" to other lenders, IT companies and corporates.
However, the Government has refused to change the regime because of fears of a political backlash. Remuneration is not mentioned the terms of reference.
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 by Ulster Bank and KBC Bank Ireland that they were exiting the market, Mr Donohoe conceded in July by agreeing to oversee a "broad-ranging review" of the sector.
The sector is grappling with ultra-low interest rates, high capital demands and an influx of fintechs and non-banks vying for parts of their business.
Both departing lenders have blamed the elevated levels of capital that Irish banks must hold in reserve against loans, a legacy of the financial crisis that has served to depress shareholder returns, as big factors in their decisions to retreat from the market.
For consumers, the shrinkage of the market to just three retail banks will erode competition, particularly the small-business lending space. However, stock-market analysts say the planned carve-up of the Ulster Bank and KBC Ireland loan books between AIB, Bank of Ireland and Permanent TSB (PTSB) will add scale to remaining banks, helping them to rebuild profitability to levels that investors see as the sign of healthy banks.
Interest rates
The Department of Finance review will include a focus on developing the mortgage market and how competition and capital requirements feed into the setting of interest rates.
The average interest rate on a new mortgage in the Republic, 2.72 per cent as of September, is the second-highest in the euro zone and more than double the currency bloc’s average rate.
The terms of reference also include plans to map out the current retail banking landscape and likely market trends over the next decade; draw lessons from banking sectors in similar-sized open economies; and implications of Covid-19 and Brexit.
The review will also assess “operational challenges” within Irish lenders’ business models and “structural changes stemming from fintech and digital finance, which are disrupting the traditional model”, the department said in a statement on Tuesday.
The department’s review also comes against the backdrop of remaining banks pushing through staff cuts and, in some cases, branch closures as they seek to rein in costs in an era of low profit returns and take advantage an ongoing move of banking activities online, which has been accelerated dramatically by the Covid-19 pandemic.
Engagement
The department is currently putting in place a dedicated team to conduct the review. It will engage with other Government departments and agencies, including the Central Bank and the Competition and Consumer Protection Commission. It also intends to engage with the likes of BPFI and the Financial Services Union (FSU) and carry out a public consultation.
“The FSU have campaigned for the last 12 months for the establishment of a banking forum where all relevant stakeholders would be involved and where a structured debate on the future of banking could take place,” the union’s general secretary, John O’Connell, said. “I am pleased today that the Minister for Finance has accepted our suggestion.”
BPFI chief executive Brian Hayes said: “What’s needed at this stage is an honest discussion on the challenges and opportunities that banking in Ireland faces. We see this review as an opportunity to focus on the future and to learn from the past. Banking in Ireland today is entirely different to banking in Ireland a decade ago.”
The Labour Party’s finance spokesman, Ged Nash, said that it would have been preferable if a process were chaired by an independent, outside expert.
“The Department of Finance has significant skin in the banking game. The State owns the majority shareholding in AIB and PTSB, and a diminishing share in Bank of Ireland,” he said.
