If the takeover of AIB by M&T Bank had gone ahead, it would have had far-reaching and certain consequences, writes Prof Ray Kinsella
The ownership of major domestically-based institutions matters. Even in a world of integrated globalised financial markets, including increasingly concentrated cross-border institutions, there is an intuitive acknowledgement that the takeover of a major domestic retail bank has far-reaching implications, not alone for customers but also for public policy.
The disclosure that the board of AIB gave serious consideration to a takeover of the bank by the US based M&T Bank has serious implications.
AIB have been swift to point out that the proposal, which came before the board last autumn, was simply part of a wider strategic review. In a world of intensive pressure on banks to deliver ever-increasing shareholder value, and which is merciless in its retribution on those who fail to do so, keeping all options open is imperative.
It doesn't mean it is sensible - it's just the way things are.
Nonetheless, the fact that the proposal was brought before the board, and at a time when the bank was immersed in the travails of investigations related to over-charging and of the illegal Faldor scheme which existed up to 1996, does concentrate the mind on a number of key issues.
Mainstream thinking highlights the benefits to consumers and to the wider economy of competition, not alone within the domestic environment, but across Europe. The Irish financial sector is highly open in terms of overseas participation. Recent entrants into the retail banking market have been welcomed.
In Ireland, what were the "associated banks" - the core retail clearing banks - grew up with the Irish economy. There was, until relatively recently, an implicate contract of benign oversight as a quid pro quo for a willingness on the part of the banks to lend a sympathetic ear to government initiatives. This contract was enforced by the enormous significance of the banking sector as a whole to the economy, which is still the case. The retail banks themselves employ some 30,000 people, and are a significant contributor to the Exchequer.
All of this bears on the issue of the likely impact of the proposal, had it been endorsed, for takeover of the AIB by M&T Bank.
Some consequences would have been certain. Firstly, there would have been a rationalisation and some downsizing - simply because this would have been built into the funding of the acquisition.
Secondly, the migration of strategy, and possibly key functions, from Ireland would have eroded the contribution by the bank to the domestic economy, and its potential leverage in regard to public policy.
Thirdly, the experience of New Zealand strongly suggests that foreign ownership of the core banking franchise reduces government scope for policy intervention.
Compared with the pre-internal market era, there is a wholly new set of parameters within which governments can operate in respect of safeguarding national banking systems from competition, including takeover.
Protectionism, under the guise of maintaining national champions in the public interest, is explicitly prohibited and rightly seen as subversive of the interests of consumers and of the wider economy.
It is, quite simply, a fact that overseas predators have "run the rule" over both AIB and Bank of Ireland. The possibility of a takeover of either or both is very real. Both banks now operate in a highly-contestable domestic market, with a number of rapidly-growing, domestically-based challengers, such as Irish Life Permanent TSB, as well as recent, and potential, entrants using a variety of traditional and e-based platforms for servicing both customers and new-value propositions.
It is in the interests of the Irish economy and the Irish consumer that at least part of the core domestic banking franchise remains in Irish hands. The example of both RBS and Bank of Scotland highlights the fact that a strong domestic platform can serve a base for significant overseas expansion, with real economic and reputational benefits. Such reputational benefits have a particular resonance for Ireland Inc, not least given the importance of the IFSC and the significance of Ireland as a high-quality location for foreign investment. For this to happen, both of the domestic banks need to take on board not just the rhetoric, but the reality, of a new ethically-based business model.
At the heart of the business model is the restoration of public trust based on a contract with the consumer, not just as an economic entity, but also as an individual.
There remain, for example, wholly anachronistic pockets of discrimination with regard to women customers. Equally important, both banks need to engage with all of their staff not simply on a contractual basis, but rather on the basis of a relationship with those individuals who, ultimately, are responsible for generating shareholder value. The Irish Bank Officials' Association has engaged in a constructive and robust relationship with bank management, and is deserving, not just of trust, but also of a place on the panels that are part of Ifsra's supervisory system.
The extent, manner and rationale of significant job-cuts in the case of Bank of Ireland, for instance, require justification that has not been forthcoming.
This represents a weakness, not just in the bank's strategic objectives, but also in its capacity to secure itself from a prospective takeover bid from abroad.
It is important, and not just for shareholders, that AIB and Bank of Ireland regain a sense of confidence and direction. An ethically-based and forward-looking business model, operating within the context of significant opportunities generated by economic expansion, is the best guarantor of high performance and continued independence of AIB.
Prof Ray Kinsella, of the Michael Smurfit Graduate School of Business in Dublin, is author of the forthcoming Internal Controls and Risk Management Systems