Government Publishes Review of Banking Sector

Introduction

A recent review of the Irish banking sector provides a snapshot of the sector and makes a number of recommendations designed to promote competitiveness. It expresses concern regarding the potential impact on competition of a merger involving the major Irish banks, but acknowledges the possibility of takeovers by foreign banks seeking exposure to the Irish economy or access to the European Union.

Background

In late 1999 the Minister for Finance appointed a group of officials from the Department of Finance and the Central Bank to carry out a strategic review of the Irish banking sector. The group has recently published its report, in which it notes developments such as the rationalization and consolidation of the financial services industry worldwide, the blurring of the distinction between banks and other financial institutions, and the growth of e-commerce. The report goes on to consider the impact of these developments on Irish retail banking, a market segment which is more sheltered from competition than others.

Eleven banks operating in Ireland have a significant presence in retail banking through the operation of branch networks, although the top five of these own some 90% of all bank branches. While the European Central Bank has classified the general Irish banking market as one of medium concentration, certain segments (including retail banking) are significantly more concentrated. Irish banks are highly profitable and their cost/income ratios compare favourably with those of other countries. However, increased competition for traditional bank services has led to a declining trend in net interest margins in recent years and a move towards non-interest sources of income, such as stockbroking and life assurance.

The report notes that in the next decade, the impact of competition is likely to be felt in three strategic areas:

• mergers and acquisitions;
• retail payment systems; and
• bank branch networks.

The group took the view that mergers between domestic banks (especially between the two largest banks) could achieve large cost savings, but would also raise major issues of excessive concentration. It therefore concluded that a large-scale merger primarily based on rationalizing costs is unlikely. It is possible, however, that an Irish bank could be purchased as part of a growth and diversification strategy based on seeking exposure to the Irish economy or access to the European Union.

Payments Systems

The group noted that Irish banks are engaged in a range of initiatives to develop the retail payments system, sometimes competitively and sometimes cooperatively. These include the development of internet platforms, a trend towards online debit card processing and the use of ‘electronic purse’ technology. These developments could have a major pro-competitive impact by ensuring that Ireland has an open, integrated payments system.

Branch Banking

The group noted that it is likely that the remote delivery of banking services will become at least as important as branch-based delivery, and that this is likely to increase the pressure for branch consolidation.

Concluding Recommendations

The group concluded by making a series of recommendations, including the following:

• The existing exemption of licensed credit institutions from the provisions of the Mergers and Takeovers (Control) Acts 1978/1996 should be removed. In other words, banking mergers should be subject to the same general merger control regime as mergers between other enterprises;
• The regularity authority for financial services should monitor and report on competitiveness in the financial sector;
• The Central Bank should undertake a full review of the organization of the retail payments system;
• The Department of Finance should review taxation arrangements for payment mechanisms with the view to promoting more efficient (eg, electronic) systems; and
• In light of developments such as branch closures and internet banking, the banking sector should develop strategies to ensure access to banking services for different regions and social groups.

For further information on this topic please contact Gerald FitzGerald at McCann FitzGerald by telephone (+353 1 829 0000) or by fax (+353 1 829 0010) or by e-mail ([email protected]).
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