The report into competition in banking published by the Competition Authority yesterday has done nothing to enhance the already tarnished reputation of the sector. The conclusion is simple and hardly surprising: banking in the Republic is not competitive. In this context, the decision - also announced yesterday - of Danske Bank to pay €1.4 billion for National Irish Bank and Northern Bank is worthy of examination.
The bulk of the purchase price relates to the larger Northern Ireland operation, but the Danish bank has still paid a full price to enter the market in the South. It remains to be seen if the Danes are here because they see opportunities to grow the National Irish franchise through real competition or merely want a share - albeit small - of the fruits of an uncompetitive and extremely profitable market. There are already several foreign-owned players in the Irish market, but only Bank of Scotland and Northern Rock can be said to have brought genuine competition in their sectors.
Yesterday's report for the Competition Authority focuses on personal current accounts and lending to small business. The authors argue that these are the core of most banking relationships and in neither case can competition be said to be working to the advantage of the customer. More often, it is to the contrary. Evidence of this was contained in the report's highlighting of the failure of the banks to pass on interest rate cuts which cost small businesses some €85 million a year.
The report accuses the existing banks of "locking in" their customers by maintaining a range of barriers to the switching of accounts. Their reason is two-fold. It provides the banks with a gateway through which to sell a range of other services such as mortgages and it makes it harder for other players to enter the market.
More competition in the provision of personal and business current account facilities is seen as instrumental to a healthier market. The bulk of the study's 40 recommendations relate to this issue and the most substantive deal with reform of the clearing system which facilitates the movement of funds between accounts.
The report proposes changes which will make it easier for new banks to join the system and thus offer current account banking at competitive rates. The second element of the strategy is a commitment by the banks to adhere to a voluntary code that will facilitate the changing of accounts.
If implemented, the recommendations would undoubtedly lead to more competition. But, as the small business lobby identified yesterday, such an eventuality is far from certain. The Competition Authority has no powers to make the banks implement the desired changes. Instead it is hopeful that they will do so voluntarily in response to public pressure and a realisation that a more competitive market is in their long-term interest. On the basis of past history alone, it is hard to share the authority's optimism.