Banks braced for ‘broad-ranging review’

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, Minister for Finance Paschal Donohoe conceded in July by agreeing to oversee a "broad-ranging review" of the sector.

A report published this week by Banking & Payments Federation Ireland (BPFI) suggests he might be opening up a can of worms if he seeks to act on some of the concerns the lobby group has highlighted.

Much of the 64-page tome covers well-aired issues, such as the low profit returns of Irish lenders, relative to European peers. They are more reliant on interest income, rather than fees and commissions, at a time of ultra-low interest rates. Moves by AIB to buy Goodbody stockbrokers and enter a life and pensions joint venture with Canada Life, and by Bank of Ireland to purchase Davy, will merely help at the edges.

Shift online

Irish banks, too, have been behind the curve in recent years cutting jobs and branches, according to the report, even if they have been catching up of late, taking advantage of a Covid-accelerated shift by customers online, to axe jobs and locations.

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And, of course, banks and customers alike are paying the price for the fact that Irish lenders are stuck having to hold almost three times as much expensive capital against their home loans as the European average.

The Minister is currently considering the terms of reference for his review and will bring a memo to Cabinet “in the coming weeks”, a spokesman for his department told Cantillon.

But will he go near some of the more controversial areas that the BPFI report went into, such as claims that Irish lenders are at a disadvantage to European rivals amid an ongoing bonus ban and cumbersome repossession regime?

‘Growing disadvantage’

The prohibitive 89 per cent levy on variable pay among domestic banks is putting them at a “considerable and growing disadvantage” to other banks, IT companies and corporates, BPFI said. Its claim was handily underscored earlier in the week by Bank of Ireland chief financial officer Myles O’Grady’s decision to quit and move to food group Musgrave.

A Korn Ferry report Donohoe commissioned in 2018 into remuneration in the sector has been gathering dust for more than two years. For very good reason, as it is known to have made the politically inconvenient recommendation that the bonus restriction and a general pay cap be eased.

The BPFI also called out European Banking Authority research that shows that Ireland has one of the lowest court-ordered repossession rates in Europe for mortgages in default. This only adds to the reasons why Irish bank capital requirements – and interest rates – are well above the European norm. But, again, is there really any political appetite to address this one?