The Government should take a Golden Share in one of the big banks in preference to the mooted merger of AIB and BoI, argues Paul Sweeney.
The huge clamour for State intervention in the marketplace against the sale of the TV rights to the Ireland home soccer matches may have come too late. The FAI had already privatised the games to Sky Sports, and the Government, which could and should have acted earlier, was left looking very silly. It remains to be seen whether the action now being taken by it can retrieve the situation.
A bigger and - with respect to soccer fans - much more important event is being planned which would have major economic, social and regional implications for Ireland. The Government knows about it, but is not interfering in the marketplace - yet. But in this case, it had better make up its mind on what is best for the country before it is again too late.
The issue is the proposed merger of AIB and Bank of Ireland, which together already control 80 per cent of retail banking in Ireland. There appears to be a powerful campaign against competition and in favour of the creation of a powerful quasi-monopoly bank.
The argument is that if AIB and Bank of Ireland merge, they will create an Irish bank which will see off any takeover bids by "foreign" financial institutions. The argument in favour of the Irish banking behemoth is that it would not distort competition in the EU, and a quasi-monopoly might be worth enduring domestically if it is Irish.
A year ago such a proposal would be laughable on grounds of competition, but now that the new chief executive of Bank of Ireland, Michael Soden, is backing it, the notion appears to be gaining support. The recent decision by the two banks to merge their important IT functions may be the first step to such a merger.
Both banks are small by market capitalisation, but, if they merged, the new bank would still be small by international standards. Thus it is not insulated from takeover even by doubling its size to €24 billion. The new merged bank would still not make the top 20 banks in Europe and would be far down the international banking table.
In fact, the merger would facilitate a takeover of the new bank because the merged entity would have already completed the "dirty work" of mass redundancies, 100 branch and head office closures, rationalisation etc. It would have increased shareholder return substantially from second place in all Europe to a level far ahead of all other banks. It would provide only one takeover target instead of two. By necessity the takeover would be by a foreign bank and it would undermine the reasoning behind the merger proposal in the first place, to retain an Irish-headquartered bank.
AIB and BoI are among the most profitable banks in Europe already. Last year total return on shareholders' funds (TSR) for the Bank of Ireland was the second-highest in Europe at 36 per cent (after Northern Rock), with AIB coming a close fourth at 27 per cent return. Many European banks made a negative return. AIB and BoI were high in the five-year TSR table, too.
Profitability is already high, particularly in the domestic market. BoI profit per employee was €61,000 last year.
Irish banks are also very efficient by European standards, with low cost-to-income ratios and a low number of branches and employees per head of population. This indicates that Irish bank customers are already paying charges and fees which are very high by international standards. With one bank, will the charges fall?
The financial regulator, the Irish Central Bank, which has a poor record of regulation as the Ansbacher Report demonstrated, has a policy of bank stability at the expense of more consumer-orientated banking. This policy makes the Central Bank's job easy. Judged by its record, this regulator will agree to a merger on bank stability criteria and will not consider the wider public/consumer socioeconomic interests. Thus it will fall on the Government to bolt the stable door.
The proponents of the merger are correct in identifying the threat to the economy with the takeover of both banks by one headquartered, say, in Basle, which would not be responsive or sensitive to, for example, a crisis in Irish agriculture.
However, the solution of creating a monopoly from the duopoly does not address the issue. It just makes takeover easier. There is, however, a radical step which the Government could take if it wished to retain one indigenously-based bank, but it would be controversial. It could agree with the management of one of the big two banks to take a Golden Share in order to block (foreign) takeover.
The long-awaited decision by the European Court of Justice on the use of Golden Shares was made on June 4th. This clarifies the use of Golden Shares by governments and allows the use of such shares where there are "overriding requirements of the national interest".
Thus such a government intervention in Irish banking, with the agreement of one bank, may be feasible. This may be radical, but the alternative is worse - the merger, wholesale redundancies, closures, poor service and ultimately the takeover, anyway, of the new merged monopoly bank. Will the Government learn from the FAI debacle?
Paul Sweeney, an economic and business adviser, was a member of the Competition and Mergers Review Group, representing the ICTU.