Bankers' Federation chief tells Cliff Taylor, Economics Editor, that a heavy-handed response to recent banking problems could damage the competitiveness of the sector

Pat Farrell took up the job of chief executive of the Irish Bankers' Federation (IBF) at the start of the year, with a brief to promote more actively the profile and interests of the sector.

In the meantime, the job, which always looked challenging has taken on mammoth proportions.

The revelations of overcharging at AIB and problems at its investment arm have dealt a heavy blow to the sector's reputation. The report from an investigation into the issue is due before the end of this month.

As if that was not enough, the High Court is to indicate next week the publication plans for the six-year investigation by inspectors it appointed to examine malpractices at National Irish Bank. Two major investigations into Irish banking could be published within a few days of each other.

It is quite a backdrop against which to have to promote a positive image of the sector. However, Mr Farrell insists it can be done over a prolonged period, given a consistent approach and a focus on the key role of the sector in the economy.

Public and investor confidence has been damaged, he concedes, and this has brought the sector to a "defining moment".

Those with the powers and expertise are undertaking inquiries into what happened and appropriate actions will follow. Damage has been done and "the sector cannot afford a repetition of events the like of which we have seen recently".

However, Mr Farrell insists there has been overreaction to the recent revelations, creating a danger of "knee-jerk" regulation and legislative changes which could ultimately be against the best interests of the sector and the economy.

The key economic role of banking must be borne in mind, he argues, as well as the potential to develop further international financial services in the Republic.

"In recent years the banking sector has become a whipping boy for the corporate sector," he argues. Banks have got caught up in the general antipathy to institutions and have suffered in a climate where the public often rush to judgment, he believes.

"We live in a country which, from morning to evening, runs on outrage," he says. "As someone who is a shrewd observer said to me, from the time Morning Ireland is on there is outrage, by mid -afternoon the court of public opinions wants someone held to account, by evening they want the guilty party hung drawn and quartered."

Banks have been the recipient of much of this public ire in recent weeks - and more is surely to come as the investigations are published. Already many new rules and obligations are either in place or on the way under legislation from industry regulator the Irish Financial Services Regulatory Authority (IFSRA).

Mr Farrell warns that this must not lead to a rush to impose a raft of new regulations on the sector, which could backfire in the long-term by hitting competitiveness. "Policy made on the hoof or as part of a knee-jerk reaction is not good policy," he says. "There is a very real danger that, in the environment of recent times, we start going down the road of regulation creep."

IFSRA has made a good start, he believes, and policymakers at a high level understand the competitive issues, particularly with new EU entrants enviously eyeing the success of the IFSC.

However, a heavy-handed response "could damage the competitiveness of sector" and limit its ability in the long-term to attract international investment.

"We must have high standards and a sound regulatory environment but there is always a need to ensure that it does not become a source of competitive disadvantage."

He insists reaction to the investigations must be measured by the very significant part banking plays in the economy. Six months into the job, he is about to embark on the first phase of a campaign to try to highlight this.

The financial industry now employs 51,500 people, spends €3.7 billion on wages, services and projects in the economy and pays €1.4 billion in tax.

Total assets of the sector exceed 4 per cent of gross domestic product - high by international standards - and the growth "from nothing" of the IFSC has given Ireland a leading position in some international financial niches, such as the issuance of asset covered securities.

Mr Farrell also points to the regional contribution of the sector, pointing to cities such as Kilkenny, where 800 are employed in financial services due partly to the presence of State Street from the US, and to his home county of Leitrim, where credit card company MBNA employs 1,200 people.

Even with such figures, have the recent scandals dealt a lethal blow to customer confidence?

Both consumer and investor confidence have been hit, Mr Farrell says, but equally he believes that what has been highlighted are "legacy issues" - reflecting an environment that has now changed.

Increased competition and the advent of a single powerful regulator has changed the market beyond recognition, he contends.

The current debate is characterised by a mix of fact and fiction, according to Mr Farrell.

Contrary to popular assertion, he argues that banks are generally trusted by their customers. Traditionally, survey data have shown the vast majority of customers are satisfied with their banking relationship, he points out. This will have "taken a hit" from recent events, but a strong base remains.

The "appropriate" level of profits for banking is always a matter of debate, of course. Recent figures from IFSRA have pointed out that, in some areas, the margin between what the banks pay out to depositors and what they take in has actually widened over the past few years.

However, Mr Farrell is insistent that, on average, there has been consistent downward pressure on the overall net interest margins earned by the financial institutions across their range of products, highlighting increased competition.

In the wake of recent revelations, there has been much debate about the role of banks and the pressure on them from the financial markets to relentlessly drive up profits.

Mr Farrell believes that banks are moving away from the old model of selling individual products to one where they seek to build long-term relationships with their customers.

Banks have put considerable investment into understanding their customers, he says, arguing that this model can also lead to "profitable banking".

Among the targets of the IBF campaign will be senior political figures, many of them known by Mr Farrell from a previous job as Fianna Fáil general secretary.

Two years ago, stuck for cash in the budget, the Minister for Finance, Mr McCreevy, imposed a three-year levy on the sector.

"We were a soft touch," Mr Farrell says and the State has done further damage to competitiveness - and technological progress - through increasing taxes on credit and charge cards.

There is a "serious job of work" to be done on legislators, he says.

This covers not only competitive issues but also regulation. Recently an Oireachtas Committee sought to undertake an investigation of the AIB issue, which is being probed by IFSRA and by the former Comptroller and Auditor General, Mr Lauri McDonnell.

While not commenting directly on the committee's actions, Mr Farrell said that, once politicians establish a regulatory framework, "they cannot expect to parallel that. They should leave the regulator to get on with its job and then deal with any policy issues which result."

The banks must also change, he says. Mr Farrell's experience in the sector - he was formally head of marketing and communications at the EBS Building Society - suggests to him that banks must become less "self-absorbed".

"I have a very firm conviction that the sector hasn't been particularly good at telling its story about the positive contribution it makes. When we are minded as a sector to get that message out to the wider public, I believe we can."

He argues that the fragmentation in the representation of the sector - currently involving more than a dozen representative bodies - hinders its communications.

Regulation has moved to a single body, he says, and the industry is consolidating into big players operating across a range of areas. In this environment, it would be appropriate, within the next five years, to move to one strong representative voice, Mr Farrell says.

His plans for a new pro-active IBF are a pitch to ensure that it takes this dominant role.