New research by the Central Bank suggests that the level of competition amongst financial institutions in Ireland is neither the worst nor the best in Europe but that the sector is one of the most profitable.
The study, contained in the latest Irish Banking Review, also noted the greater reliance on generating profits from interest rate-related activities, such as lending, than their European peers.
Its findings come at a time when the newly established Irish Financial Services Regulatory Authority (IFSRA), which operates independently but is accountable to the Central Bank, is investigating the speed with which banks pass on interest rate cuts.
The research states that both Finland and the Netherlands have highly concentrated banking systems.
Finland has around 350 banks, yet just three account for roughly 80 per cent of its loan and deposits. In the Netherlands, just four banks account for 80 per cent of domestic lending. Ireland, by comparison, has a banking system of "medium" concentration, according to the report.
The state of competition amongst Irish financial institutions is currently being considered by the Competition Authority. It will focus initially on issues such as the provision of current accounts and business banking, the areas where competition is said to be lowest.
It is currently accepting submissions from consumers and from the financial institutions and has asked the banks to answer a series of questions to assist its study. Bank of Scotland is expected to respond today.
The Central Bank firmly acknowledges the robust profitability of the Irish financial services sector.
"It is apparent that Irish banks have in the past been considerably more profitable than most banks in some other euro-zone economies. It is likely that this reflects an exposure to the substantial growth rates experienced by the Irish economy in recent years", it states.
The authors, Mr Trevor Fitzpatrick and Mr David Doran, are both attached to the monetary policy and financial stability department of the Central Bank.
They stress that it is also important to remember that, by and large, profitable credit institutions also tend to be financially sound and contribute to the stability of the financial system.
It notes that Irish banks compare favourably with some other European states, such as Germany and the Netherlands, on their cost base.
The study says Irish financial institutions have been diversifying their activities beyond core lending and deposit-taking in line with developments in the economy but that the decline in revenue from core activities has not been offset by an increase in other forms of income, such as fees and commissions.
The regulatory authority's investigations have been widened and it continues to seek additional information from financial institutions to determine whether consumers are being disadvantaged in the way that interest rate cuts are passed on.
Some banks have failed to pass on the full amount of the reduction in European Central Bank rates to their customers, stating that this was to protect the amount of interest they could pay to depositors.
IFSRA's inquiries should determine whether the financial institutions are in fact boosting their profit margins in this way.
