Banking Sector: Some Strategic Issues
Report of the Department of Finance/ Central Bank Working Group on Strategic Issues facing the Irish Banking Sector
An Overview of Irish Banking
A. The Structure of Banking in Ireland
Ownership of Retail Banks
International Financial Services Centre.
B. Banking Services
A. Main Influences
Globalization and Deregulation
B. Mergers & Acquisitions.
Diversification and growth
C. Retail Payments System
D. Branch Networks
Mergers & Acquisitions Law.
Competition & the Consumer
Retail Payment Systems
Promotion of Electronic Payment Mechanisms
Irish Financial Services Centre
Appendix One: Membership of the Working Group
Appendix Two: Submissions received by the Working Group.
Appendix Three: Credit Institutions reporting to the Central Bank
Appendix Four: Common Good considerations applying to cross border bank mergers and takeovers
Appendix Five: The National Payments Strategy
1. Bank Assets.
3. Other Financial Institutions
5. Bank Branches.
Figure One: Branches & Sub-Branches of the Clearing Banks
Figure Two: Number of Branches per 1,000 capita - 1997
Figure Three: Breakdown of Deposits by sector
Figure Four: Breakdown of Credit by type of borrowing
Figure Five: Breakdown of Credit by Counterparty
Figure Six: Mortgage Rates 1998-99
Figure Seven: Notes and Coins in Circulation as % of GDP
Figure Eight: Volume of Non-Cash Transactions by type 1990
Figure Nine: Volume of Non-Cash Transactions by type 1998
Figure Ten: Membership of Irish Payments Services Organization Ltd & Clearing Companies
Figure Eleven: Cheques and Credit Transfers as % of cashless transactions
1. The Report first provides an overview of banking in the Irish economy. This is followed by a review of strategic issues facing Irish banking. Finally, the Group makes recommendations in relation to policy issues arising from expected developments.
Overview of Irish Banking
2. The Report focuses on retail banking; that is the personal sector and the small and medium-sized enterprises (SMEs) sector. More than eighty credit institutions offer banking services in Ireland, of which eleven have a significant involvement in retail banking by operating branch networks. Most Irish banks are publicly quoted companies. The majority of shareholders are private individuals with relatively small holdings although the bulk of the shares are held by institutional investors, including pension funds and insurance companies. An increased proportion of shares in the larger banks are owned abroad. There is a significant foreign presence in Irish banking. The development of the International Financial Services Centre (IFSC) has increased the internationalisation of the Irish banking sector, with IFSC entities operating mainly in the wholesale sector. In terms of employment, Ireland is close to the EU average for numbers working in banking relative to population. There is a comparatively small number of bank branches and Automated Teller Machines (ATMs) per head of population relative to most other countries in Europe.
3. The main services provided by retail banks in Ireland include the traditional intermediation functions (deposit-taking and loan provision), money transmission services through retail payments systems, and, to a growing extent, other services such as providing stockbroking facilities and life assurance products. Increased competition for savings has obliged banks to provide new products which offer higher rates of interest than traditional demand deposits. Interest rates available to savers appear to be competitive by the standards of other euro area countries. The paucity of data, however, prevents firm conclusions being drawn on the cost of loans, especially for the SME sector.
4. The ECB has classified the Irish banking market as one of medium concentration. However, elements of Irish banking, including retail banking, are significantly more concentrated. Irish banks are highly profitable, which partly reflects the countrys strong economic performance in recent years. Cost/income ratios for Irish banks also compare very favorably with those of other countries. Increased competition for traditional bank services has led to a declining trend in net interest margins in recent years and a move towards non-interest sources of income.
Strategic Issues Facing Irish Banking
5. The Group identified two main factors affecting change in the banking sector. These are (i) globalisation and deregulation and (ii) developments in technology. Both have contributed greatly to increasing the competitive environment in which banks operate. The Group viewed this increase in competition as a welcome development but noted that it also posed certain challenges. The Group identified three strategic areas likely to have policy implications for the banking sector in the next decade. These are: (i) mergers and acquisitions; (ii) retail payments systems; and (iii) bank branch networks.
Mergers and Acquisitions (M & As)
6. The two main motives for mergers and acquisitions are the rationalisation of costs and the diversification of growth. The Group concludes that a takeover or merger primarily based on rationalising costs is unlikely. It is possible that an Irish bank could be purchased as part of a diversification strategy, based on seeking exposure to the Irish economy or access to the EU. Domestically, mergers or takeovers for cost rationalisation purposes (especially a merger of the two largest banks) could achieve large cost savings but would also raise major issues of excessive concentration.
7. Regarding the implications of developments in information technology (IT), two factors are identified which may have policy implications, namely the type of technology in which banks invest and the timing of the investment. The technical issues have a major competitive significance in that they are relevant to ensuring that Ireland has an open, integrated payments system. The banks are currently engaged in a range of initiatives to develop the retail payments system, sometimes competitively and sometimes cooperatively. These include the development of internet platforms, examining a move to on-line debit card processing and the prospects for electronic purse technology.
8. Banking products have traditionally been delivered through an extensive branch structure. However, the role of branches is changing, reflecting the centralisation by banks of the processing of payments and the provision of credit and the emergence of methods of remote delivery of banking services. The Group considered it likely that remote delivery will become at least as important as branch based delivery and that organising the transition to this very different approach to the delivery of banking services will increase the pressure for branch consolidation.
9. In light of the expected developments in banking and the policy issues which arise from these, the Group has made a number of recommendations:
(i) With the prospect of increased mergers and acquisitions activity in Ireland and in Europe generally, it is appropriate that the exemption of licensed credit institutions from the provisions of the Mergers, Takeovers and Monopolies (Control) Act, 1978 should be removed. In that event, proposed mergers should be assessed by the Minister for Enterprise, Trade and Employment and, where appropriate, the Competition Authority in consultation with the regulatory authority for the financial services sector in order to ensure compliance with competition laws and so that they are in the best interests of bank customers and the economy generally. Accordingly, Section 77 of the Central Bank Act, 1989, which gives the Minister for Finance a role in the supervision of acquisitions of bank assets, should be deleted.
(ii) As part of its general reporting responsibilities, the regulatory authority for the financial services sector should be mandated to monitor and report on competitiveness in the financial sector as it affects bank customers.
(iii) The Central Bank should carry out a full review of the organization of the retail payments system and its report on this matter should be provided to the Minister for Finance and published.
(iv) Part of the savings to banks from the restructuring of Corporation Tax should be used to make electronic/automated banking transactions more attractive to a wider range of customers while maintaining appropriate charges for paper-based transactions. In the context of the banks having implemented proposals on this, the Group recommends that the Department of Finance should then review taxation arrangements for payment mechanisms with a view to promoting the move to more efficient (e.g., electronic) systems without reducing the overall yield.
(v) The banking industry needs to develop a strategy (whether involving agency arrangements with other non-bank retail outlets, electronic arrangements or otherwise) to address the issue of maintaining appropriate mechanisms for and levels of access (in all regions and by the different social groups) to banking services in the context of possible future developments such as internet banking, closure of branches and rationalization in the branch banking system. The regulatory authority for the financial services sector should monitor and report on this from a customer perspective.
10. Appendices One and Two provide information on the work of the Group. Appendix Three lists credit institutions reporting to the Central Bank. Appendix Four considers whether there are special considerations arising in relation to cross border mergers in the banking sector and concludes that there are not. Appendix Five sets out the current position in relation to on-going work between the banks and the State to develop new retail payment options.>
1.1 On 4th November, 1999, the Minister for Finance, Mr. Charlie
McCreevy T.D., announced that he intended to carry out a strategic review of
the future of Irish banking. He invited submissions from the industry (a full
list of submissions received is in Appendix 2) and established a group chaired
by Mr. Noel OGorman, Second Secretary General in the Department of Finance
and comprising officials from relevant areas within the Department of Finance
and representatives of the Central Bank (hereafter referred to as the
Group - a full list of the members of the Group is in Appendix 1).
1.2 The terms of reference were to consider:
1.3 The Group has noted the commitment of the Government as
set out in An Action Programme for the Millennium to promote
competition through technological innovation and regulatory reform. 1
1.4 The Group also noted that the Programme for Prosperity
and Fairness, agreed between the social partners, sets out the need
to work towards the creation of a society which responds effectively to the
constantly evolving requirements of international competitiveness.2
1.5 The Group focussed on the possible impact of a number of
developments on the banking sector and the possible policy response to these
developments. The developments included the worldwide phenomenon of the rationalization
of the financial services industry and consequent mergers and acquisitions,
the blurring of the distinction between banks and other financial institutions,
and the growth of e-commerce.
1.6 The Group concentrated on the impact of these phenomena
on the retail banking sector since it is more sheltered from competition and
because international competition should ensure an efficient wholesale banking
1.7 The general policy perspective of the Group was that the
economy is best served by having a stable retail banking sector which delivers
the highest standard and range of services to customers at competitive prices.
This requires a level of profitability and regulation necessary to ensure the
prudential soundness of individual institutions and the stability of the banking
system, transparency and fairness in the dealings of the banking sector with
its customers, and a competitive market place for banking services.
1.8 The Group did not directly examine the consumer protection
issues which arise in relation to individual products and services provided
by the banking sector. As this has already been addressed by the "McDowell
Report"3, consumer protection issues will be dealt with in a coordinated
way by the financial services regulatory authority, which is to be established.
However, this report is based on acceptance of the position as set down in the
Programme for Prosperity and Fairness concerning the interrelationship of the
competition reform issues, on which it has focused, and consumer/social inclusion
1.9 Given that the Group has adopted a retail banking perspective
and that there is a comprehensive strategy in place for the International Financial
Services Centre (IFSC), the Group did not consider it necessary to explore this
aspect of banking in Ireland further.5
1.10 The remainder of the report is organized as follows:
Chapter Two sets out the current structure of banking in Ireland.
Chapter Three identifies the major policy related strategic
issues facing banking in Ireland.
Chapter Four makes recommendations in relation to the policy issues arising.
There are also a number of appendices which deal with the following matters:
One: Membership of the Group.
Two: Submissions received and consultations undertaken by the Group.
Three: Credit institutions supervised by the Central Bank of Ireland.
Four: The concept of the common good as this applies to cross border bank mergers and acquisitions.
Five: Current position in relation to the National Payments Strategy.
Statistical Appendix: Statistics on Irish banking from a variety of sources.6
1.3 The Report represents the conclusions of the deliberations
of the Group. It has been submitted to the Minister for Finance as an input
into the policy making process.
1.4 The Group had two Secretaries - Mr. Richard Shine and Mr. Martin Moloney, both of the Department of Finance. The Group wishes to thank both for their essential contribution to the production of this report. In addition, Mr. Paul McBride and Mr. John McCarthy of the Central Bank provided invaluable assistance with the research for the report and the Group wishes to thank them for their contribution to its work. The members of the Group would also like to thank all the parties who responded to its requests for submissions or who made themselves available for consultations or otherwise provided material or assistance to the Group.
1. see P. 9-11, 25-26, 29-30, An Action Programme for the Millennium
2. P.46-48, Programme for Prosperity and Fairness
3. Report of the Implementation Advisory Group on the establishment of a Single Regulatory Authority for the Financial Services Sector, May, 1999
4. P. 47-48, Programme for Prosperity and Fairness
5. Strategy for the Development of the International Financial Services Industry in Ireland. See also paragraphs 2.23-2.28 and 4.25
6. These statistics were not collected on a harmonised basis and have not been verified or reconciled by the Group.
Banking in Ireland
An Overview of Irish Banking
2.1 The banking sector is a major contributor to the Irish economy.
In 1998, banks spent more than IR£1.8 billion [ 2.3 billion] in the economy,
paying over IR£640 million [ 813 million] to the Exchequer in taxes. The
sector is also one of the largest employers in the State, providing over 30,000
jobs. It is estimated that the contribution of banks to the Irish economy accounted
for 3.5 per cent. of GNP in 1998.7
2.2 Without an efficient financial system comprising
banks and non-bank financial institutions and financial markets no modern
economy could prosper. The main function of a financial system is financial
intermediation, i.e., facilitating the interaction between those with funds
surplus to current requirements (savers) and those in need of funds (borrowers).
Banks also contribute to the economy as providers of other financial services,
such as money transmission and payment services.
2.3 A distinction may be made between 'retail' banking and 'wholesale
Retail banking involves taking deposits and advancing overdrafts and other loans, dealing with the personal, small business, farming, non-profit, corporate and government sectors. It also involves the provision of money transmission services8, with extensive branch and ATM networks and a clearing system for the settlement of non-cash retail payments.
Wholesale banking tends to involve dealing with large corporate and government entities and includes the provision of financial consultancy including advice on dealings with capital markets. In Ireland, there is also a tradition of so-called industrial banks, which focus on instalment credit, leasing facilities and mortgage lending.
2.4 This report focuses on retail banking, especially in relation
to customers who deal in low value transactions. In the remainder of this chapter,
therefore, the term retail refers to business with such customers,
e.g., most personal customers, farmers, and small and medium-sized enterprises
(SMEs). For larger corporate customers, the degree of competition in the provision
of banking services, which is in effect international, is felt to be adequate
to safeguard the interests of the customer. Other customers typically have less
bargaining power and fewer alternatives.
2.5 Retail banking in Ireland is dominated by the main clearing
banks which are examples of the 'universal banking' model. These banks provide
a full range of financial services, based on comprehensive nationwide accessibility
and the integration of service provision across all sectors (small and large,
business and personal, etc.). This contrasts with many countries where there
is still a strong segmentation in the banking sector between retail and wholesale
banks. In Ireland, a significant number of smaller banks and building societies
also compete with the major banks for retail customers.
2.6 A major development affecting the financial sector in recent
years, in Ireland and elsewhere, has been the process of financial liberalisation
and deregulation. This has enhanced the freedom for financial institutions to
increase the range of services they offer, thus blurring the distinctiveness
of different types of institutions and removing barriers to competition. In
Europe, this process has been accompanied by the creation of a single EU market
in financial services. The single market in financial services has involved
the harmonisation of regulatory regimes through a number of key EU directives9,
and the liberalisation of capital movements with the abolition of exchange controls.
Among the directives is the Single Banking Co-ordination Directive (1992), under
which a bank authorised in any EU Member State is free to provide banking services
in any other Member State without requiring any additional authorisation. This
is what is known as the 'single passport' in banking which permits banks in
one Member State to offer services in another on a branch or cross-border basis.
The introduction of the euro also facilitates the integration of markets for
financial services and increases the transparency of pricing across Member States.
With technological advances facilitating entry into the Irish banking market,
or particularly profitable segments of it, these developments have contributed
greatly to increasing the competitive environment in which banks operate.
2.7 The remainder of this chapter looks in more detail at the
nature of Irish banking under four headings:
(A) The structure of banking in Ireland;
(B) Banking services;
(C) Concentration; and
(D) Bank profitability.
A. THE STRUCTURE OF BANKING IN IRELAND
2.8 This section provides a description of the structure of
the Irish banking system. Following a brief historical background, the main
institutional characteristics of the system are outlined, describing first the
types of institution and then the ownership pattern, with a separate subsection
on the International Financial Services Centre (IFSC). There follows a section
on employment and infrastructure.
2.9 McGowan10 traces the beginning of Irish banking back to
the late 1600s, although branch banking did not appear until the 1820s with
the emergence of joint stock banks. The basic structure of Irish banks remained
unchanged from the latter part of the 19th century until the 1960s. That decade
saw a wave of mergers and acquisitions which McGowan suggests represented part
of a process whereby Irish banking sought economies of scale and strengthened
itself to cope with the threat of external take-overs and increased competition
from abroad. This period of consolidation reduced the number of clearing banks
from eight to four.
2.10 The 1960s and 1970s also saw the entry of a number of North
American and European banks into the Irish market, increasing competition for
2.11 In the 1970s, the four clearing banks dominated retail
banking in Ireland; competition was limited and interest rates were set by arrangement.
Competition among these banks was increased in the 1980s by the ending of the
interest rate arrangement and, subsequently, by increased competition from other
2.12 In the past, a distinction was made between institutions
holding a banking licence issued by the Central Bank under Section 9 of the
1971 Central Bank Act (licensed banks) and other credit institutions. The latter
included domestic institutions exempt from the requirement to hold a licence12
and credit institutions operating in Ireland but authorised in another Member
State of the EU. Domestic institutions providing banking services but not required
to hold a licence included State-owned banks, savings banks, building societies
and credit unions. Nowadays, all deposit-taking institutions, with the exception
of credit unions, are supervised by the Central Bank and are described by the
common rubric 'credit institutions'. All of these are subject to the same supervisory
regime. A list of institutions supervised by the Central Bank at end-1999 is
set out in Appendix 3.
2.13 More than eighty credit institutions offer banking services
in Ireland. Almost sixty of these are incorporated in Ireland, while the remainder
are authorised in another EU Member State and operate in Ireland on a branch
basis. Excluding institutions with predominantly foreign business and those
not engaged in taking deposits from or granting loans to personal or small business
customers in Ireland, the number of institutions involved in retail activity
is probably around thirty. Of these, eleven have significant involvement in
retail banking through branch networks13, and four of those are predominantly
involved in mortgage business.
2.14 Apart from retail banks, there are three building societies
which also provide retail banking services14. One of these (ICS Building Society)
is owned by the Bank of Ireland. Building societies are traditionally specialised
mortgage lending institutions, although the Building Societies Act, 1989, allowed
them to diversify into other banking activities. The number of building societies
in Ireland has declined in recent decades from sixteen in 1980 to three today.
This decline has resulted from transfers of engagements (mergers) and demutualisations.
Demutualisation has involved the conversion of two institutions into public
companies, First National Building Society (now First Active) and Irish Permanent.
The main reason for these changes was the restriction which mutual status placed
on the ability of these institutions to expand their capital base. In 1999,
Irish Permanent merged with the largest life assurance company in the State,
Irish Life, to form Irish Life & Permanent, the third largest financial
institution in the State in terms of asset size.
2.15 There are also two savings banks in Ireland. The Post Office
Savings Bank is owned by the Government and is a deposit-taking institution
whose deposits are all loaned to the Government. The other is a trustee savings
bank (TSB Bank) and is mainly concerned with retail lending and money transmission.
2.16 In addition, there are two State-owned banks: ACC Bank
and ICC Bank (the latter with a subsidiary, ICC Investment Bank). The Minister
for Finance has asked both banks to prepare for a change of ownership.
2.17 In addition to the above, there are over 400 credit unions
in Ireland, which are co-operatively owned entities15. They report to the Registrar
of Friendly Societies. They have traditionally provided savings and loan facilities
at local level. The Credit Union Act, 1997, expanded the role of credit unions
by permitting them to lend larger amounts for longer periods.
Ownership of Retail Banks
2.18 Ireland is relatively unusual internationally in having
such a predominantly commercial banking sector, which is owned mostly by individual
and institutional shareholders. In continental Europe, specialised institutions
without an exclusively commercial character such as savings banks, mutual societies
and State-owned banks still play a more significant, if declining, role. The
ownership of US banking is fragmented. Many developing countries have banking
systems in which the State is involved to a significant degree. The countries
whose banking systems are most like Ireland are the UK, Canada, New Zealand
2.19 The two major Irish banks, AIB Bank and Bank of Ireland,
are both publicly quoted companies and have raised the bulk of their capital
through the Irish Stock Exchange. In each case, ownership is widely diversified,
with over 100,000 shareholders, most of whom are private individuals with relatively
small holdings.16 In the case of AIB Bank, 41 per cent of shareholders own fewer
than 1,000 shares each, while in the case of Bank of Ireland this figure is
54 per cent.17 These small shareholders, however, own just 1 per cent of the
total shares. Like similar publicly quoted companies, the bulk of shares in
the two largest retail banks are held by institutional investors, including
pension funds and assurance companies - 78 per cent of the shares in Bank of
Ireland and 65 per cent of the shares in AIB Bank are held in share holdings
of more than 100,000 shares.18 An increased portion of the shares in AIB Bank
and Bank of Ireland are now owned abroad. At end-1999, a majority of the shares
(by value) in AIB Bank were owned abroad.19
2.20 The conversion of two building societies (Irish Permanent
and First National) into public companies has further increased the dominance
of public companies in the ownership of Irish banking.
2.21 Not all banks operating in the Irish market have been owned
in this way. The involvement of banks operating from a base in Belfast in banking
activities throughout the island has led to the involvement of major British
banks in Irish banking. Ulster Bank became a subsidiary of London County and
Westminster Bank in 1917 and as such subsequently became part of the UK National
Westminster Bank Group, recently purchased by Royal Bank of Scotland. The Northern
Bank (Ireland) Ltd (now National Irish Bank) was acquired by Midland Bank in
1965 and was then sold in 1987 to National Australia Bank Group.
2.22 There has also been a sizeable number of overseas banks
operating at the upper end of the Irish corporate market. This element partly
dates back to the 1960s and was closely linked to the level of foreign direct
investment in Ireland. More recently, the development of the International Financial
Services Centre (IFSC) increased the internationalisation of the Irish banking
International Financial Services Centre
2.23 The International Financial Services Centre (IFSC) was
established by the Government in 1987 with its principal objective being the
creation of a broad-based and well-regulated financial services industry in
Ireland which would provide quality, sustainable jobs. The IFSC has since developed
into a significant centre for a wide range of internationally traded financial
services. The types of activity located there include international banking,
corporate treasury, life and non-life insurance business, collective investment
schemes, the service providers to such schemes, securities trading, brokerage
operations, financial advice and back-office operations.
2.24 Potential IFSC projects were assessed and approved by the
Certification Advisory Committee, which made recommendations to the Minister
for Finance regarding whether or not a project should be approved for the special
tax regime applying in the Centre. This committee is made up of representatives
from the Department of Finance, IDA, the Central Bank and the Department of
Enterprise, Trade and Employment.
2.25 Changes to the then existing arrangements were put in place
in the second half of 1998. These arose from negotiations between the Irish
Government and the EU Commission regarding specific tax regimes in Ireland and
resulted in the introduction of a quota system for project approval during 1998
and 1999. The IFSC regime does not apply to projects established after 1999.
2.26 Each IFSC project approved had a minimum employment commitment
which was determined by the type of project and the nature of proposed activities.
At end-December 1999, there were 388 active projects involving direct and back
office employment of over 8,500 staff. The IFSC has also made a significant
indirect contribution to employment in areas such as accounting, legal, information
systems and other general services industries.
2.27 The IFSC banking sector has been at the core of the Centre's
development since 1987. Many of the world's major international banks as well
as the principal Irish banking institutions have established offices at the
IFSC. Almost all credit institutions operating in the State have also been approved
to conduct international business from the IFSC.
Approval is conditional on dealing with non-residents.
2.28 The majority of the licensed banks in the IFSC concentrate
on granting relatively low-risk, low-margin credit facilities to high-quality
international corporate customers, central and regional governments and banks.
For the most part, funding is obtained from wholesale sources and from parent
2.29 Employment in banking in Ireland has risen consistently
for decades and currently stands at around 31,000 which represents 65 per cent.
of total financial sector employment.20 Between 1960 and 1990 total employment
in the insurance, finance and business sector almost quadrupled.21 Banking employment
grew throughout the 1990s, reinforced by the emergence of the IFSC which now
employs some 8,500. According to the most recent figures, overall financial
sector employment increased by 2,400 between December 1998 and December 1999.
Employment in banking increased by 1,600, in the insurance sector by 700 and
in the building societies sector by 100. The overall increase is equivalent
to a year-on-year growth rate of 5 per cent.
2.30 Figures for 1997 show Ireland as having bank employment
per 1,000 population just below the EU average if Luxembourg, with its exceptionally
high figure, is excluded.22 Ireland is unusual in that it experienced a large
increase in bank employment between 1985 and 1997, whereas most other countries
recorded only small increases or declines. This is probably due in part to the
development of the IFSC and to the rapid overall growth of the Irish economy
over this period. Salaries in the banking sector are, on average, around 144
per cent of the average gross industrial wage (1999) and 118 per cent of total
average wages (1996). In Ireland, average banking sector wages as a percentage
of total average wages are somewhat below the EU average, with only Greece having
a significantly lower figure.23
2.31 Branches have traditionally been the main distribution
channel for retail banking services. They continue to be the predominant form
of access to banking services, with over 40 per cent of respondents to a recent
survey using branches once a week or more, 55 per cent saying they 'mostly use'
branches and 93 per cent having visited a bank branch at least once in the previous
twelve months.24 The technological changes in the way payments can be organised
and the move to remote access to banking services have now begun to change fundamentally
the environment in which branches have traditionally operated.
Source: See Table 19
2.32 The number of bank branches and sub-branches in Ireland
fluctuated in a range of 700-1,000 for most of the last century.25 At all times,
there is an ongoing requirement to adjust this branch network as population
moves and economic activity alters. For example, the growth of new suburbs and
the emergence of suburban shopping centres has led to the opening of bank branches
in or near these centres. Quite independently of the development of e-banking,
the profound changes in the Irish economy in recent years mean that this kind
of restructuring is happening at the present time. However, there is, to date,
little sign that banks have reduced the size of the branch network. While the
number of sub-branches26 has been in decline, figures for the period up to end-1999
have continued to show overall branch numbers stable at just under 900. In the
ten years to end-1999, the number of branches increased by 39 (5.5 per cent),
while the number of sub-branches decreased by 65 (34 per cent).
2.33 One recent international survey has observed that "Ireland...is one of the few countries where the branch network has been maintained, and employment in the banking sector is growing strongly."27 Nevertheless, ECB figures suggest that the number of branches per 1,000 population would be higher in other EU countries by comparison with the U.K. and Ireland. This reflects the pattern of localised banking in those countries.
Source: Statistical Appendix Table 20
2.34 Population coverage, the nature of local demand and the
range of services can vary also from branch to branch within the country. For
example, an analysis of the spread of bank and building society branches by
province and county shows Leinster having the lowest number of branches per
population and Ulster28 having the highest. In terms of individual counties,
the range goes from Kilkenny with a population of over 3,400 per branch to Leitrim
with a population per branch of approximately a third of that figure.29 This
kind of pattern reflects the settlement pattern in the country as a whole and
the greater level of urbanisation in Leinster. Traditional branch banking in
rural areas involved significantly higher branch overheads and there is still
an effective cross-subsidisation of rural branch banking by urban concentrations.
This is part of a more general pattern whereby branches have characteristic
market profiles, in accordance with the patterns of distribution of residence
and business activities.
2.35 As already stated, individual banks and building societies
are constantly altering their branch networks. A particular phase in the development
of branches is currently underway. Smaller banks and building societies, in
particular, have begun to restructure branches and the major banks will follow
a similar course. The issues arising are discussed in the next chapter.
2.36 The number of ATMs in Ireland increased steadily during
the 1990s, but in terms of the total per 1,000 population, Ireland appears at
the lower end of the EU spectrum.30 However, the Irish customer is a much heavier
user of ATM cards than the average EU citizen/bank customer.
B. BANKING SERVICES
2.37 This section examines the main services provided by retail
banks in Ireland, making comparisons, where possible, with other EU countries.
First, the traditional intermediation functions (i.e., deposit-taking and loan
provision) are looked at in turn. Following that, retail payment systems are
discussed. The final division within the section comments on some other services
provided by banks.
2.38 One of the core banking activities involves the provision
of savings products to meet the needs of those who have funds surplus to current
requirements which they wish to set aside for the future. Savings by acquisition
of financial assets represents part of the wealth of a nation. A 1993 report
found that financial assets accounted for an estimated 8 per cent of total wealth
in Ireland31 and that two thirds of these financial assets were in the form
of bank deposits. Over 56 per cent of Irish households held deposits. Deposits
accounted for over three quarters of the financial assets of lower income groups,
falling to just over half the financial assets of higher income groups.32
2.39 At end-1999, deposits of non-Government Irish residents
with resident credit institutions amounted to about IR£56 billion [ 71
billion]. Of this, almost IR£28 billion [ 35 billion] was held by the
clearing banks and close to IR£24 billion [ 30 billion] with other banks
operating mainly in the domestic market.
Source : Central Bank Quarterly Bulletin Spring 2000, Table C9
2.40 There has been increasing competition for savings from
outside the banking sector. Traditionally, the main competitors for deposits
were the banks and the State (in the form of the Post Office Savings Bank and
Savings Certificates/Bonds). Investment in assurance savings products has traditionally
represented about 30 per cent of annual investment in financial assets. From
the 1960s to the 1980s, building societies increased their share of the savings
market33 and credit unions have also developed a sizable deposit base.34 Indications
are that long term savings through pension schemes and savings products such
as single premium bonds and tracker bonds have also proven attractive as has
direct stock market investment.35 There has also been a move, more recently,
away from low interest demand deposits to term and notice accounts which are
less liquid but offer a higher return. The arrival of Northern Rock into the
retail funding market, offering a high interest, instant access postal account,
has been another element in this increased competition for deposits.
2.41 Banks have responded in three ways:
- by offering a wider range of deposit products, with varying maturity dates,
- by developing assurance subsidiaries, in part to attract long term savings, - by supplementing savings by interbank borrowing and capital markets funding (e.g. bonds and securitisations).
2.42 Closely related to the pressure on the deposit savings
market is the issue of pricing. Demand deposits constitute 24 per cent of total
deposits in the market.36 The interest rate offered by banks in relation to
these products has traditionally been low. Banks have rarely offered a rate
over 2 per cent. The relationship between wholesale 'interbank' rates and these
demand deposit rates has remained roughly stable over recent years.37
2.43 Term deposit accounts make up 48 per cent of Irish deposits.38
These products offer a higher rate of interest than demand deposits, but with
reduced liquidity.39 Rates for term deposits are significantly higher than for
demand deposits. Currently, certain term and notice accounts deposits are often
available at rates which equal or even exceed the rates available on the interbank
2.44 An international comparison shows one month rates in Germany
in January 2000 were 2.84 per cent. In Austria, savings deposits with a maturity
up to 12 months received a rate of 2.31 per cent. In Portugal, deposits with
maturity of 31-90 days received a rate of 2.84 per cent. The average rate throughout
the euro area for deposits with agreed maturity up to one year was 2.73 per
cent, while the average euro area rate for deposits redeemable at notice of
up to 3 months was 2.04 per cent.40 While there is significant variation in
the rates offered by individual institutions, the rate for similar products
in Ireland has been in the region of 1 per cent higher.
2.45 The overall pattern is that the environment facing banks
in the savings market has become increasingly competitive, interest rates have
been driven up, but bank deposits continue to constitute a major savings mechanism
in the Irish economy.
2.46 The following two charts show the breakdown of lending
by Irish credit institutions at end-1999 by counterparty and by type of credit:
Source: Central Bank Quarterly Report Table C9
2.47 Of the IR£72 billion [ 92.2 billion] of private
sector credit provided by credit institutions at end-1999, just under IR£26
billion [ 32.9 billion] was lent to private households. Of this total,
mortgage lending was the largest portion at just over IR£19 billion [
2.48 Definitive comparative data on the overall cost of borrowing
in Ireland are not easily available, particularly in relation to loans to small
business. The Group concluded that it did not have sufficiently reliable and
detailed figures available to it on the basis of which to draw conclusions about
the pricing of credit in Ireland. The lack of reliable, internationally comparable
figures is undesirable and increases public uncertainty in relation to competitive
conditions in the banking sector. The Group addresses this issue in Chapter
Source: See Statistical Appendix Table 30
2.49 A marked fall in the cost of residential mortgages occurred
during 1999, in absolute terms and relative both to interbank levels and to
rates in other euro area countries.41
2.50 The average standard variable mortgage rate for Irish mortgage
lenders was around 6 per cent at end-1998, compared with a euro area average
of about 5.3 per cent. By end-1999, it had fallen to 4.19 per cent, below the
euro area figure of 5.79 per cent.
2.51 A significant development in the Irish mortgage market
relevant to these events has been the emergence of mortgage brokers and the
development of telephone banking. In August 1999, the Bank of Scotland entered
the Irish mortgage market, depending to a significant extent on these distribution
methods and offering a standard variable rate substantially below the rates
prevailing in Ireland at that time. Irish institutions reduced their rates,
thus demonstrating the importance for effective competition in the Irish banking
sector of accessibility to the Irish banking market for EU banks.
2.52 Table 31 in the Statistical Appendix shows rates for unsecured
personal loans, for amounts of IR£3,000, comparing the levels in each country
to a base rate. On the basis of these data, Irish personal loan rates are relatively
high, although lower than in the Netherlands and the UK. In the latter case,
this is partly accounted for by the fact that the general level of interest
rates is higher in the UK than in the euro area. Adjusting for this by
comparing the margins between personal loan rates and a base rate, margins in
the UK emerge as higher than in the euro area countries. The authorised overdraft
rate for Ireland is also at the higher end of the range.42 Although the UK rate
is higher, of the quoted euro area countries, only Portugal has a higher rate
2.53 The pricing structures for credit cards in Ireland are
different from those applying in many other European countries, where annual
charges normally apply and where credit card use is higher. For this reason,
pricing is not strictly comparable. Irish consumers who pay off their bills
within the interest free period or who maintain a low average debit balance
over the year may tend to pay less for their credit card than many other European
credit card holders. On the other hand, those in Ireland who use credit cards
as a method of borrowing tend to pay more than they would by using authorized
overdraft or personal loan facilities and tend to pay more than counterparts
in other European countries also using credit cards as a method of borrowing.
2.54 This is because of the annual charges, but lower interest
rates which apply on credit cards in much of Europe. Annual charges do not automatically
apply in Ireland and, where they do, apply at a significantly lower rate. But,
as one recent survey identified, an average EU credit card interest rate was
12 per cent compared to an Irish average of 19 per cent.43 This matter is further
complicated by the varying charging periods applied by different credit card
suppliers. Furthermore, there is a belief that competition in the credit card
market has put downward pressure in the recent period on the average interest
rate on credit cards in Ireland. It is recognized that interest and charges
structures for credit cards are complex and the indications from this one survey
are not conclusive. These differences in pricing structures require further
analysis before a conclusion can be drawn. The requirement for further work
is addressed in Chapter 4.
Source: Statistical Appendix Table 34
2.55 As can be seen from Figure 7, Ireland is a below
average user of cash, by European standards. Germany is the highest and the
Finland is the lowest. The cheque is still the main means of non-cash payment
in Ireland. However, its use by volume has declined from 78 per cent. of total
non-cash payments in 1990 to 62 per cent in 1998.44 Direct debit and electronic
payments have grown by volume in the same period from 11 per cent. of total
payments to 34 per cent. Within the EU, Ireland has a level of cheque usage
rivaled only by France.45 Even allowing for the fact that some other countries
have traditionally depended on credit instructions rather than cheques (which
are debit instructions), the Irish position clearly lags behind others in the
use of card-based, credit transfer and direct debit transactions.
2.56 According to research done in 1998, some 53 per cent of
Irish adults at that time did not have a bank account with a payments settlement
capacity. However, over 90 per cent of adults had either a bank, building society,
credit union or post office account. At least 40 per cent of businesses paid
wages by cash/cheque. About 75 per cent of all transactions involving cash at
banks were done by cashiers. Regular bill payments broke down as follows:
Regular Bill Payments by method of payment
Individual to Business
Business to Business
Direct Debit (incl Electronic)
Source: Boston Consulting
Organization of payments, settlement and clearing systems in Ireland
2.57 In Ireland payments, clearing and settlement systems are
operated by the banks in conjunction with the Central Bank. The main payment
instruments are cash, paper (e.g. cheques) and electronic cards. Non-cash payments
involve one bank account being debited and another one being credited with the
corresponding amount. The process by which the various banks involved settle
between themselves for the obligations arising on behalf of their customers
issuing/lodging non-cash instruments is through clearing systems. The net aggregate
obligations, calculated centrally, arising between the participating banks in
the systems are settled across the settlement accounts of these institutions
held at the Central Bank.
2.58 Payments systems can be categorised as large value wholesale
systems and small value retail systems. (The large value system in Ireland is
dominated by the real-time gross settlement system (RTGS) which involves instant
electronic payment for banks and their business customers, across banks
accounts at the Central Bank.) This section, in common with the rest of the
report, deals with retail operations.
2.59 Three classes of retail payment, clearing and settlement
systems operate in Ireland. These systems are owned and operated by private
sector entities established by the credit institutions. The systems provide
for cheque settlement, credit settlement and electronic credits/debits settlement.
2.60 The different retail payments systems (electronic, paper
debit, and paper credit) are operated through a number of limited companies,
the shareholders of which are also represented on the board of an umbrella company
which represents the payments industry in Ireland. This is the Irish Payment
Services Organisation (IPSO). Any credit institution can become a full member
of these systems so long as they comply with technical and volume criteria and
are prepared to contribute to the operating costs.
2.61 The various retail payments systems are all overseen by
the Central Bank. For paper debit and credit systems, there are seven full members,
including the Central Bank, with seven others having an interface via a full
member. Other credit institutions which issue cheque books to customers operate
through clearing agents which can be any of the banks mentioned in Figure 11.
The membership of the electronic system comprises six full members (the Central
Bank is not a participant) with currently one other bank having an interface
via a full member.
Membership of Retail Clearing Companies
Banque Nationale de Paris*
Bank of Ireland
National Irish Bank
Irish Life & Permanent
Source: IPSO/Central Bank
BNP acts also in an agency capacity for Ansbacher, ABN AMRO,
Bank of America, Barclays, Citibank, Guinness & Mahon and HSBC.
2.62 The central office of the clearing companies is used to
a very limited extent as the physical location for the central exchange of items
collected by participating banks. Its main function is in relation to the calculation
of settlement obligations. The vast majority of items are exchanged bilaterally
between the clearing departments of the participating banks. The clearing process
is effectively, therefore, a formalised series of bilateral exchanges of paper
and electronic data which have been established according to commonly agreed
documented rules and procedures. Participating banks recover their own clearing
department costs. Central costs are recovered from participants based on percentage
of transaction volumes. As there is very limited central processing, the latter
costs are relatively minor.
2.63 At present, when a cheque is lodged it is delivered back to the branch of the customer against whom it is drawn. This is a costly system involving the transport of cheques throughout the country. A more efficient system would leave the cheques in the branch in which they were lodged and transmit the information relating to the cheques electronically, thus creating an electronic clearing system. This process of leaving cheques in the branch in which they were lodged is called truncation. The legal provisions to permit this to happen have already been enacted. The system of cheque clearing without truncation has been in place for a long period. It is timely that the Central Bank, as overseer of the payments systems, reviews this process in the context of developing a euro area wide retail payments systems. This is discussed further in Chapter 4.
2.64 In some countries, the equipment for clearing paper and
electronic payments is located and operated centrally in what are termed Automated
Clearing Houses (ACHs). In Ireland, the equipment is owned and operated
by the individual banks and the clearing involves bilaterally swapping
paper, tapes and, increasingly, electronic data transmission, and calculating
centrally the net amount owed to each institution. This is not an arrangement
used widely in other countries and the question arises as to whether a central
clearing system might be more efficient. This issue is taken up again in Chapter
2.65 Apart from the functions described above, banks are increasingly
involved in providing a range of other services. These include:
pensions & long term savings products
2.66 A recent estimate suggested that some 17 per cent of Irish
adults now own shares.
The flotation of Telecom Eireann (now Eircom) and the demutualization of Irish Permanent and First Active have contributed to the increased extent of share ownership. There has certainly been significant growth in retail investment into the stockmarket.
2.67 Stockbroking in Ireland is closely integrated with banking.
The two major Irish banks now own the two largest stockbroking firms and all
four of the major stockbroking firms are part of banking groups.
2.68 It is a notable feature of the Irish stockbroking market
that there is, as yet, no Irish-based on-line trading option. These are expected
to be developed later this year. Fees per transaction for small retail customers
are also somewhat high by comparison with fees in the U.K. or the U.S.
2.69 A trend in Europe, which is also evident in Ireland, is
the development of what is termed bancassurance. This refers to
a situation where banking and assurance businesses are combined. The most notable
example in Ireland is the merger of Irish Life and Irish Permanent in 1999.
One motive for this trend is the maintenance of access to savings which are
moving increasingly into long term savings products. Another has been to use
bank branches as a supplement to the traditional direct sales force and insurance
broker distribution channels.
2.70 Internationally, the development of links between assurance
companies and banks is most developed where savers are least inclined to use
or have least direct access to equity markets. The assurance arms of the Irish
banks have a significant market share in life assurance and, mostly as agents,
in property and motor insurance products. It has been estimated that 24 per
cent of the life and pensions premiums were distributed through bank branches
2.71 Estimates of concentration in the Irish retail banking
sector vary. One recent estimate gives the top five Irish banks 90 per cent
of the overall domestic retail banking market. Another recent estimate puts
this at 82 per cent while a third study suggested lower levels of concentration
2.72 The ECB observes that the degree of concentration varies
quite significantly across EU countries, with large countries tending to have
less concentrated banking systems than the small ones. The Irish market is classified
as one of medium concentration, along with those of Austria, Belgium, Spain
and France. The ECB figures show that, taking the five largest institutions
for each EU country and expressing their loans as a percentage of total loans
in each country, Ireland is ranked eighth in terms of concentration on the basis
of 1997 data.
2.73 That is not to say that elements of Irish banking may not
be considerably more concentrated. Certainly the physical infrastructure of
banking in Ireland is dominated by the five clearing banks which account for
about 83 per cent of the employment of licensed banks and 90 per cent of branches
and sub-offices. These institutions also accounted for 40 per cent of total
resident assets of all credit institutions at end-1999, with the two largest
banks accounting for 83 per cent of this. The five largest banks, and especially
the biggest two, largely dominate retail banking aided by their role in the
money transmission system.
2.74 To the extent that a market is contestable (i.e., if it
is relatively easy for new institutions to enter the market) there is an incentive
for existing institutions, even in a relatively concentrated market, to remain
competitive in order to discourage new entrants from challenging for the more
profitable business. Recent developments have tended to increase contestability
in banking, making it more difficult, even in a relatively concentrated market,
for institutions to exploit market power.
2.75 None the less, a high degree of concentration does increase
the danger of uncompetitive practices and possible overcharging of customers
with less bargaining power and fewer alternative options (e.g., most personal
customers and SMEs). Because of legal, taxation and language barriers to overseas
entry into the Irish market, added to customer inertia and information asymmetries,
local institutions are likely to retain some degree of market power with respect
to these customers. There has been some increase in competition for products
aimed at the household sector (e.g. savings, credit cards, residential mortgages).
The SME sector is still largely reliant on loan finance supplied by the traditional
banking sector. In relation to the SME sector, the requirement for client history
and information monitoring are significant natural factors discouraging
new entrants offering new competition.
2.76 In the context of a single financial market in the EU,
the question arises as to whether concentration should be measured on a national
or a EU-wide basis. The essential issue is probably one of market power. For
banking activities involving very large customers, even if a national market
is dominated by a few institutions, the customer can easily deal with institutions
in other countries. For such business, the relevant market would extend beyond
national boundaries. It is more appropriate to monitor concentration for retail
banking at a national level.
Mergers, Takeover and Competition Regulation
2.77 There has been an international trend towards increased
financial sector consolidation in recent years, with a notable pick-up in merger
and acquisition (M&A) activity. There has been a certain amount of such
activity in Ireland in recent years, but the two largest banks have tended to
focus on foreign acquisitions. National authorities have an obvious interest
in monitoring concentration in their local banking market, especially in retail
banking, to guard against a situation where a small number of institutions achieve
an overly dominant position. Mergers, takeovers and competition legislation
in Ireland provides a role for the Government to ensure that this does not occur.
2.78 The key legislation in this area in Ireland is the Mergers
and Takeovers (Controls) Acts, 1978 - 1996. Holders of a banking licence are
specifically exempt from the provisions of this legislation. In practice, however,
the wording of the legislation gives rise to some uncertainty about the position
of banks. Where a proposal for a merger or takeover comes within the scope of
the Acts, each of the enterprises involved is required to notify the Minister
for Enterprise, Trade and Employment in writing. The Minister has the power
to approve the proposal, with or without conditions, or to prohibit it. The
Minister may refer a proposal to the Competition Authority if he/she
feels that the exigencies of the common good warrant it. The Competition Authority
is obliged to investigate every proposal referred to it and report
to the Minister. The report must state the Authority's opinion as to whether
or not the proposed merger or takeover concerned would be likely to prevent
or restrict competition or restrain trade in any goods or services. The report
must also give the Authority's view on the likely effect of the proposed merger
or takeover on the common good in respect of the criteria laid down in Section
17(4) of the Competition Act, 1991. The Minister must publish the report of
the Competition Authority within two months, with due regard to confidentiality.
2.79 As a separate matter, under current law, the Central Bank's
approval is required for the acquisition of any holding of more than 10 per
cent in a bank. The Central Bank's role in this regard is purely that of prudential
regulator and a refusal to approve any takeover bid can only be made on the
basis of prudential concerns. The legislation states that the Bank may not refuse
approval unless "it is satisfied that the transaction would not be in
the interests of the orderly and proper regulation of banking".
2.80 The Minister for Finance also has a role in relation to
acquiring transactions concerning banks. Under the Central Bank Act, 1989, any
acquiring transaction involving a licence holder which controls 20 per cent
or more of the total assets in the State of all licence holders requires the
approval of the Minister for Finance. To quote from the Central Bank Act:
"The Minister shall not give his consent unless
(a) he is satisfied that the Bank's proposal to give or refuse to give its approval, as the case may be, would be in the interests of the orderly and proper regulation of banking, and
(b) where the proposed acquiring transaction is of such a nature that the provisions of the Mergers, Takeovers and Monopolies (Control) Act, 1978, apply, he has consulted with
(i) the Minister for Industry and Commerce, and
(ii) such other Minister of the Government appearing to the Minister to be concerned, and he shall refuse to give his consent where he considers that the exigencies of the common good so warrant."
2.81 The extent of the Minister's powers under this section
hinge on an interpretation of the terms 'orderly and proper regulation of banking'
and 'common good'. The Act provides no guidance as to their meaning. While the
Central Bank would tend to interpret these terms using prudential criteria,
the Minister could decide that a broader view should be taken.
2..82 Where a proposed merger exceeds the EU thresholds and
two thirds of the business of both parties to the merger is not within one State,
the relevant authority is the EU Commission. Its investigations are carried
out in phases. Phase One involves an initial examination to establish whether
there are any issues. At this stage national authorities may provide views to
the Commission. If the Commission does not identify any issues which may justify
rejection of the proposal, an 'Article 6.1.b.' decision to approve the proposal
2.83 Phase Two involves the initiation of proceedings which
involve more detailed investigation and consultation with the Advisory Committee,
made up of representatives of Member States. Ireland is represented on this
Committee by the Department of Enterprise, Trade & Employment. Following
the Phase Two investigation a 'Section 8' decision to approve or prohibit the
proposed merger is made.
2.84 The highest level of concentration of general significance
which has been allowed by an EU decision arose from the merger of Fortis AG/Generale
Bank in Belgium, which created concentrations in various banking sectors ranging
up to 39 per cent of branches in one geographic region and a 38 per cent concentration
in corporate loans.
2.85 A key factor in the Commission's decisions has tended to
be its assessment of effective access to competitors. In the past, the Commission
has taken the view that retail banking is a separate market segment and that
retail markets are national markets. Accordingly, for retail banking, concentration
levels within individual Member States have been considered. If that approach
were not taken, i.e. if the banks were considered as operating in a larger market,
concentration at the national level would be significantly less of an obstacle
to mergers or takeovers within a Member State. It remains open to the Commission
to change its approach as the market develops. The Commission has indicated
that differing competitive conditions in different national areas are the key
consideration in this regard.
D: BANK PROFIT
2.86 Internationally, bank profitability varies widely. There
are a variety of reasons for this:
particular characteristics of economic development
regulatory and taxation environment
structure of the financial sector in general and banking in particular
2.87 One study has found that where banks play a larger role
in the economy and concentration is lower, margins and profits tend to be lower.
This study also found that foreign banks tend to have lower margins than domestic
banks in developed countries.48 In the Irish case, there is a relatively high
level of concentration in the domestic banking market and a large role for banks
in the economy. These factors are associated with a relatively high level of
2.88 A recent analysis of profitability in European banking
has found a strong trend towards the growth in non-interest income linked to
the broadening of the range of products offered by banks. In Ireland, non-interest
income as a percentage of operating income increased by 80 per cent between
1985 and 1995. Traditionally, in Ireland, the main source of banking profits
has been net interest income (i.e., the difference between interest
paid to depositors and that earned from borrowers). In recent years, however,
net interest margins have been falling. Irish banks net interest margins49
fell from 2.4 per cent. (1996-97) to 1.7 per cent (1998-99), despite a growing
economy. The fall in interest margins is a trend which is also evident across
Europe, reflecting increased competition for traditional bank intermediation
2.89 Banks have introduced a range of charges on payments services
which were previously cross-subsidised by lending margins. This is by far the
most important component of the non-interest income mix in the Irish banking
sector. Fees and commissions accounted for 68 per cent of non-interest income
for the Irish banking industry for the period 1995-1998.50 Such charges are
subject to approval by the Director of Consumer Affairs.
2.90 Institutions have also sought to diversify their operations
and to increase their product range, offering investment funds and assurance
or pensions products as alternatives and as complements to traditional deposits.
Banks have also developed their financial product trading activities and securitization
operations leading to a further shift in the source of bank income towards non-interest
income. The major Irish banks now have sophisticated treasury operations which
are a significant source of income. The two largest Irish banks have also become
involved very substantially in ownership of banks in other countries and this
is a major determinant of their overall profitability.
2.91 The fall in domestic interest margins is clearly being
driven by competitive pressure. But it is also facilitated by the introduction
of such transaction charges for payment transactions over recent years, a development
which undermines the cross-subsidisation of payment systems by other banking
activities and makes the pricing of credit more transparent.
2.92 In addition to the level of concentration and the development
of non-interest income, the third major influence on the profitability of Irish
banks is the substantial growth in credit in the Irish economy with the result
that bank profitability is benefiting simply from the increased volume of lending
and deposit activity in recent years. This is a cyclical feature. Any downturn
in the economy would be reflected in profits, just as lower profits in earlier
periods reflected the condition of the economy at those times. Bank profitability
is particularly susceptible to cyclical movements and international comparisons
of profitability which measure banks operating in economies at differing points
in the economic cycle are not comparisons of like with like.
2.93 All international comparisons need to keep this in mind.
Average figures for the 1990s show Irish banks having the highest return on
assets of all EU countries (1.77 per cent).51 Looking further back, figures
for 1985 suggest that at that time the return on assets and the return on equity
in Ireland fell below profitability in various other European countries, having
been higher in 1980. In the 1990s, the profitability of Irish banks again rose
well above European levels, including the U.K. which would be the most similar
banking market. Thus, while the profitability of Irish banks can fall below
that in other countries, due probably to varying economic cycles, Irish banks
tend to be among the more profitable banks internationally.
2.94 Historically, the reason for this appears to have been
that Ireland has tended to have one of the higher interest margins (3.2 per
cent). That drives the high overall income margin of Irish banks (4.6 per cent).
Irish banks profit performance is therefore similar to Denmark, which also has
a higher interest margin (3.5 per cent) and a higher contribution from non-interest
income. Denmarks overall return on assets of 1.55 per cent is somewhat
lower than Irelands and may reflect its higher operating costs. The profitability
of U.K. banks is also similar to Ireland. However, operating expenses are higher,
interest margins are lower, while the contribution from non-interest income
is greater. The biggest contrast within the EU is with French banks, which have
a return on assets of only 0.16 per cent and interest margins of only 1.3 per
2.95 If we look at the performance of the top commercial banks
in each country, the performance of the main banks is significantly better than
the country average. In Irelands case, the top commercial banks were earning
an interest margin, on average, over 1990-98 of 4.1. per cent. Non-interest
income pushed the total income margin up to 6 per cent creating a return on
assets of 1.3 per cent.
2.96 It is difficult to make generalisations from these figures.
However, taking the historical trend into account it is still reasonable to
view Ireland as tending to have one of the more profitable banking systems not
merely on a cyclical but also on a long term basis.
2.97 For a given volume of activity, high profitability can
result from higher charges, higher interest margins, or a higher level of efficiency
through a lower cost base. A tendency to somewhat higher margins is one factor
in explaining the profitability of Irish banks. The cost base is also a factor.
Currently, Irish banks' cost/income ratios compare very favourably with other
countries, averaging around 58 per cent over the past few years compared with
an EU average of over 65 per cent. In 1997, of the EU countries, only Luxembourg
had lower cost/income ratios than Ireland.53 In Ireland's case, the recent exceptional
rate of growth in economic activity has generated a large increase in bank income
and this has played a large part in reducing cost/income ratios.
2.98 Whether this level of profitability will be sustained is
not clear. Interest margins in banking in Ireland have been falling quickly
in recent years. It might be reasonable to expect them to converge towards rates
in other euro countries, however the pace of change is uncertain. With an international
trend towards consolidation in banking, high levels of profitability and limited
scope for further economies in Irish banking would tend to reduce the vulnerability
of Irish banks to takeover by ensuring that they would be relatively expensive
acquisitions with virtually no economies to be made. What is clear is that as
well as diversifying into new activities and developing new products and delivery
channels, Irish banks will need to focus on maximising efficiency in order to
ensure a continued strong profitability performance in an increasingly competitive
2.99 Banks continue to play an important role in the Irish
financial sector and the economy as a whole. The nature of that role is continuing
to evolve, with banks offering an expanded range of products, developing new
delivery channels, and generally operating in an increasingly competitive environment.
Banks face greater competition on both the asset and liabilities side from banks
in other countries, from non-bank institutions and even from entities, such
as retailing outlets, which did not previously offer financial services. Financial
liberalisation and technological advances are amongst the main developments
generating new competitive pressures for banks in Ireland as elsewhere. Both
factors facilitate entry into the market, possibly in a niche capacity targeting
particularly profitable types of business ('cherry-picking'). This has the effect
of reducing the scope for cross-subsidisation, with banks increasingly forced
to price their products according to cost, including risk.
2.100 Increased competition for Irish banks is reflected in
a declining trend in net interest margins. This is obliging banks to seek efficiency
gains and to develop new products that generate non-interest income. Irish banks
have been able to generate very high levels of profitability, due in part to
2.101 For large customers, the banking market is highly competitive.
Some competitive gains are also evident for the smaller customer (e.g., for
savings, residential mortgages, credit cards) and others may follow. It is still
the case, however, that domestic banks retain some degree of market power with
respect to these sectors which needs to be monitored. A lack of data hinders
this exercise. The development of monetary union and the single financial market
in the EU should help an assessment of the extent to which smaller customers
in Ireland fare with respect to the provision of banking services as transparency
of pricing across the euro area facilitates comparisons.
7 Figures taken from the Irish Bankers Federation Factfile, May, 2000
8. In Ireland, the retail clearing system is operated by the five clearing banks, i.e. Bank of Ireland, AIB Bank, National Irish Bank, Ulster Bank and TSB Bank. See Paragraphs 2.62-2.63
9. These directives apply to ll the countries of the European Economic Area, i.e. the 15 members of the EU and also Norway, Iceland and Lichtenstein
10. Money and banking in Ireland, P.MacGowan, Institute of Public Administration, 1990
11. Since that period, the clearing arrangements have been revised and other banks have become involved either directly or indirectly - see the section on payments.
12. Under Section 7 of the Central Bank Act, 1971, as amended by Section 30 of the Central Bank Act, 1989
13. Bank of Ireland, AIB Bank, National Irish Bank, Ulster Bank, TSB Bank, Irish Life and Permanent, First Active, EBS, ICS Building Society, Irish Nationwide Building Society and ACC Bank.
14. EBS Building Society, Irish Nationwide Building Society and ICS Building Society. See Statistical Appendix Table 11.
15. See Statistical Appendix Table 10.
16. IBF Factfile, op cit.
17. See Statistical Appendix Table 6
18. See Statistical Appendix Table 7. By one estimate, Irish institutions held between 32-36% of the shares in these banks in 1998, see Table 8.
19. See Statistical Appendix Table 5 and also Table 8.
20. See Statistical Appendix Table 12
21. The Association between Economic Growth and Employment Growth in Ireland, NESC, December, 1992
22. See Statistical Appendix Table 15
23. See Statistical Appendix Tables 13 & 16
24. Internet - Irish Financials, Goodbodys Stockbrokers, April 2000
25. The situation is somewhat complicated by the use of agencies and sub branches. Some banking services are also provided by post office, credit union and building society branches. Consequently, the branch network for banking services is considerably larger than the network of bank branches. See Statistical Appendix Table 17.
26. A sub-branch is a banking outlet which is not a bank branch in its own right. Opening hours will vary and can range from one or two hours per week up to a full five day service. Normally, a full banking service is not available in a sub-banch and more complex services are provided only in the parent branch and all cheques etc. issued will bear the sort code and name of the parent branch.
27. Europe's New Banks: The 'non-bank phenomenon, David Lascelles, Centre for the Study of Financial Innovation, 1999
28. Cavan, Donegal, Monaghan.
29. Using 1996 population data and 1998 bank/building society branches data.
30. See Statistical Appendix Table 35
31. Land and buildings make up the bulk of wealth
32. See The Financial Assets of Households in Ireland, P. Honohan, B Nolan, ESRI, General Research Series No 162, Dec. 1993
33. See T. O'Connell, Journal of Statistical and Social Inquiry Society of Ireland, 1986
34. See Statistical Appendix Tables 10, 11 and 23
35. See Statistical Appendix Table 23
36. See Table C3, Central Bank of Ireland Quarterly Bulletin
37 See Table 26
38. See Table C3, Central Bank of Ireland Quarterly Bulletin: this includes Agreed Maturity, Special Savings and other agreed notice accounts but not overnight deposits
39 According to www.ndb.ie/main.html there are over 1,500 different deposit account options.
40. ECB figures
41. The position is complicated by the wide variety of mortgage products offered - some 250 by one estimate, see www.ndb.ie/main.html. Developments in the mortgage market which have complicated the choice available to customers have been the emergence of fixed rate mortgage products and the emergence of discounted variable rates for new customers
42 See Statistical Appendix Table32
43. See Statistical Appendix Table 33
44. See figures 8 and 9 below
45 See Statistical Appendix Table 36
46. P 112. Financial Services in Ireland, DataMonitor, 2000
47. See Statistical Appendix Table 40-46
48. See Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence,, Asli Demiguc-Knut and Harry Huizinga, World Bank, January 1998
49. Net Interest Income/Gross Assets for all Irish credit institutions
50 Source: based on OECD data
51. See Statistical Appendix Table 52
52. See Statistical Appendix Table 52
53. See Statistical Appendix Table 53
Strategic Issues facing Banking in Ireland
3.1 The Group identified two main factors influencing change
in banking generally and the increasing competition in the banking sector in
Globalisation and deregulation;
Developments in technology.
Chapter 4 will examine the policy issues raised by the developments in these areas.
A: Main Influences
Globalisation and deregulation
3.2 Recent decades have seen a strong trend towards increasing
international integration of trade and investment, facilitated by strengthening
of international trade agreements. Investment strategies by institutional
investors have also become increasingly global over recent decades and this
has been reflected in the share-ownership of the two major Irish banks. The
introduction of the euro and the development of the single market in Europe
have led to further international integration of financial services in Europe.
The establishment of the euro, in particular, has eliminated a very significant
exchange rate risk in relation to cross border banking within the euro area.
The future is likely to see a continued consolidation in banking at the level
of individual countries and there is also likely to be consolidation at a regional
level - such as among banks in the euro countries.
3.3 The Irish economy itself has experienced very significant
growth and development in the last decade, and this has also affected the Irish
financial sector. Because of this economic development, banks find themselves
faced with increased demand for mortgages, long term savings products (including
pensions) and development finance.
3.4 Internationally, barriers between the provision of different
financial services have been greatly reduced and the various financial institutions
can now provide a broader range of financial products. This has led to the growth
of financial conglomerates worldwide. In Ireland the major banks now provide
this broad range of services. Moreover, the single market operates for financial
products and particularly for banking so that there are no regulatory barriers
to banks from other EU countries competing in Ireland or to Irish banks competing
in any other EU country.54
3.5 The recent period of investment in developing the architecture
for internet commerce in most retail sectors both nationally and internationally
has also been in evidence in the financial sector. Banks are investing heavily
in the development of internet access points for individual and corporate customers.
The Irish banks are currently in the middle of the process of enhancing their
internet platforms and making them more widely available.
3.6 The ability of institutions to access local markets and
to offer a multiplicity of products under one brand, along with the use of technology,
is calling into question the way banks have operated traditionally, and lowers
the barrier to new entrants which previously existed as a result of the need
to set up a branch network. The Internet, in particular, presents the banks
with a significant challenge. New entrants can now enter the banking sector
to cherry pick new customers and existing customers willing to move
away from the branch network.
3.7 There are four types of operators likely to make use of
the Internet to compete in the Irish banking market:
banks already established here
established banks from other markets
retailers from other sectors (utilities/supermarkets)
3.8 The potential role for new players is strongly reinforced
by the possibility of agency arrangements where retailers (bank or non-bank)
sell the banking products of other banks, either branding them as their own
or branding in a way which highlights the agency arrangement.
3.9 The potentially low cost base for such new entrants and
the ability to attract customers previously subjected to pricing partially determined
by cross subsidisation is compelling all banks to develop an internet banking
service, to restructure pricing and to control costs in the branch network in
order to remain competitive .
3.10 The Group recognized that this increase in competition
is a welcome development and is likely to bring long term benefits to bank customers
and to the economy generally. However, the changes involved also present certain
challenges. The Group sought to identify the key strategic issues in the banking
sector over the next decade which are likely to have policy implications.
3.11 Three key areas have been identified:
Mergers and acquisitions
Retail Payments Systems
B. Mergers and Acquisitions
3.12 Mergers and acquisitions and the emergence of large financial
conglomerates have proven to be a key developments in recent decades. One may
loosely differentiate two reasons for mergers or bank purchases:55
- Diversification and growth
3.13 A strong motive - though not the only one - for mergers
and takeovers in retail banking is to achieve more cost-effective operations.
Mergers and acquisitions are often seen as an effective response to a requirement
for cost rationalization because economies of scale and scope56 at head-office
and, sometimes, rationalization of branches can be used in order to eliminate
perceived surplus capacity.
3.14 Cost-driven mergers are subject to uncertainty arising
from the risk of failing to meet the cost savings targets underpinning the financing
of the merger/acquisition. There is a significant record of bank mergers failing
to meet cost savings targets.
3.15 If cost savings are uncertain in domestic mergers, they
are even more problematic in cross border mergers. Internationally, a number
of major banks are thought to be examining substantial cross-border mergers
or purchases. But it is not clear that cost-rationalisation is a significant
motive for such mergers and acquisitions.
3.16 A significant aspect of the pattern of mergers to-date
is that where these do occur, 57they tend to be concentrated in culturally,
geographically or legally similar regions - for example the Benelux region,
Iberian Peninsula/Latin America, Scandinavia, Ireland/UK. This probably reflects
the absence of some of the cultural or legal obstacles to effective rationalization
in cross-border mergers which otherwise restrict the ability of banks to increase
synergies and reduce unit costs.
3.17 Rationalization can also be closely related to issues arising
from the need to manage resources effectively by having the appropriate technical
and general management skills in place. A perceived requirement to improve management
by importing expertise can be the motive for a change of ownership of a bank,
whether because of poor operational performance, historical strategic misjudgment
or perceived strategic misjudgment for the period ahead. Given the corporate
structure of publicly quoted companies this can sometimes be seen by institutional
investors as the only way to change management culture, especially when the
market sees a requirement for cost rationalization of which management are not
3.18 Increased international integration and competition among
banks also creates a requirement for similar technical skill levels in banks
in different countries. Consequently, transfer of technical skills can be a
significant factor in international mergers and acquisitions. In such circumstances,
there may few overlapping functions, and thus limited potential for cost savings
through staff reductions (some H.Q. functions), but there is a potential for
the transfer of management and technical skills in order to develop new products
or procedures in a less developed market.
3.19 It is reasonably clear that there is very limited potential
for significant inward technical skills transfer to Irish banking from other
banking markets. The skills level of Irish banking is generally similar to that
of the most developed banking systems in the world, although there may be differences
in practices and strategic choices which create marginal skill variations in
3.20 That said, the possibility of a cross border merger or
acquisition motivated primarily by skills transfer into Irish banking cannot
be excluded. There is evidence of banks elsewhere purchasing fledgling Internet
banks or linking up with financial institutions with acknowledged expertise
in Internet banking. A reverse takeover of an established bank by a competitor
with e-commerce expertise would constitute a significant departure. A merger
with an assurance company by a bank would also probably have insurance sector
skills as a significant factor.
3.21 More generally, because of the relative efficiency of the
major banks in Ireland, there may be little scope for cost reductions through
a takeover of one of the major Irish banks. The greatest scope for cost savings
would be through a merger of the two major banks or a takeover of both by one
purchaser. These options would have scope for efficiencies through rationalizing
headquarters and branch structures. However, from a public policy viewpoint,
given that the Irish retail banking market is relatively sheltered, the resulting
concentration would currently, almost certainly, be assessed as not in the interests
of the consumer. Over time, the Irish retail market will become more integrated
within the euro area because of the euro itself, the single market and technology,
and ultimately that could change the current view.
3.22 If it becomes generally accepted that international rationalization
of processing and head-office activities is feasible, the case for cross-border
mergers will become stronger. In the absence of opportunities for cross-border
mergers/purchases which generate cost savings, the likelihood of mergers is
greatly reduced. Nevertheless, banks may still seek out mergers or acquisitions
for diversification reasons.
Diversification and growth
3.23 Mergers or acquisitions based on diversification will tend
to be defensive, providing a geographic spread of a banks exposure across
different economic regions and thus reducing the tendency to a cyclical pattern
in financial performance.
3.24 Banks may also purchase operations in different countries
to which they require access as part of a wider market. For example, there is
a view that the period ahead will see some of the larger banks in individual
EU countries develop by acquisition into regional banks covering the whole or
a large part of the EU. 59Any bank wishing to take on this mantle might wish
to purchase banks in various EU countries in order to provide local services
across the EU, although remote/internet access is also increasingly feasible.
As indicated above, this kind of diversification appears to be a significant
consideration in Europe at the present time.60 Also, banks from outside the
EU may purchase a bank within a Member State to expand without having to apply
directly for a bank licence.
3.25 An alternative to a full-blown merger or acquisition is
the strategic partnership. Strategic partnerships across industry sectors within
national economies have been a sustained feature of continental national economies,
although they have come under strain in the changed legislative and regulatory
context of the last two decades. The German insurance company Allianz and the
Spanish bank Banco Santander Central Hispano, for example, have both adopted
cross share holding strategies as a response to the current situation. Strategic
alliances have also been a characteristic response on the part of retailers
in various sectors to the emergence of the Internet as a viable retailing option.
This third way strategy has been recognized as appropriate for banks
which are unable or unwilling to pursue a trans-European universal bank strategy,
while being too diversified to focus on niche areas.
3.26 There are elements of skill transfer in such arrangements
and other elements of cost saving. The importance of developing internet banking
capacity may encourage such alliances. There are also elements of risk diversification
involved. However, many analysts remain unconvinced of the contribution to profitability
from such relationships.
3.27 Such alliances will also tend to be defensive, creating
large shareholders likely to take a long-term strategic view, rather than seeking
profit maximization over a medium-term horizon. For example, the $155 billion
in cross-shareholdings between German banks, insurers and utilities, of which
Allianz is the largest with cross-shareholdings valued at $51 billion, has been
described as having "thwarted market discipline".61Whether
or not that is true, the role of Allianz in the recent abortive Deutsche-Dresdner
merger proposal indicates that such cross-shareholdings are not always an obstacle
to mergers and acquisitions but may instead affect the terms on which such mergers
and acquisitions take place.
3.28 As the financial sector in Ireland is already highly skilled,
skills transfer is unlikely to be a strong motive for a foreign acquisition
of a major Irish bank. While a takeover or merger based on rationalizing costs
may be a somewhat greater possibility, it is still unlikely. There remains the
possibility that an Irish bank could be purchased as part of a diversification
strategy, based on seeking exposure to the Irish economy or access to the EU.
The profitability and diversification of the two main banks outside Ireland
would influence developments in relation to this option.
C. New Technology and Retail Payment Systems.
3.29 Developments in information technology ("IT")
(i.e. information collection, storage, processing, transmission and distribution)
and their impact on the banking industry is expected to continue and will require
continued substantial investment in IT by banks. There are two factors which
may have policy implications. These are:
- the type of technology in which the banks invest
- the timing of investment in that technology
Type of technology
3.30 Any period, such as the current one, in which there is
rapid technological innovation throws up a range of technical options which
compete to be adopted. Depending on factors such as the function of the technologies,
the process of competition can lead to the emergence of one dominant technical
standard (at either a national or international level) or alternative technical
arrangements can continue to compete over the longer term. The current period
is no different. There are a range of technical issues arising in relation to
various aspects of e-banking.
3.31 The technical issues involved are significant for competition
in that they are relevant to ensuring that Ireland has an open, integrated payments
system. These technical issues are not examined further in this report. It would
be appropriate for the review of the payments system recommended in Chapter
Four to consider how best to ensure that these issues are taken fully into account
in the process of determining which technologies to use.
The timing of investment in technology
3.32 It is clear from the pattern of investment to date that
there is wide scope for differences in the pace at which technological changes
are introduced in different countries, particularly in the retail banking market,
and such differences will constitute a strategic choice which will influence
competition between participants in the marketplace.
3.33 Banks cannot be expected automatically to invest in technological
innovation as soon as it becomes available. The timing of their investments
will, instead, be dictated primarily by competitive advantage in the banking
sector. Competitive advantage does not necessarily accrue to the early adopters
of new technologies. The pattern of competitive advantage in the banking sector
from technological innovation is more complex.62
3.34 In other areas of retailing, much of the recent investment
in internet retailing has depended on a concept of early mover advantage,
which, in summary, is that the first participants in internet retailing in a
sector will quickly build market share and brand image which will count as substantial
competitive advantages later on. Arguably, this is quite the opposite of the
pattern that has dominated banking investment in technology in the past, namely
that early movers were in danger of being at a disadvantage because the cost
of technological innovations is highest when they first emerge, as is the threat
of incorrect choice of technology. Competitive advantage probably tended to
lie with the bank which invested in technology after the cost began to
fall but before other banks had delivered a difference in quality of
service that the customer could discern or that affected operating costs. The
current situation is unclear, but it is fair to say, that as more banks have
begun to roll out their internet platforms, there is increased scepticism about
the extent of the advantage which has accrued to those who sought early mover
3.35 The current position with regard to technological innovation
in Ireland is that each major bank is competitively developing its internet
platform. The banks are understood to be cooperatively examining when to move
to on-line debit card processing. The prospects for the use of electronic
purse technology are being examined by banks on a competitive basis. The
development of certification procedures for on-line electronic transactions
and the possibility of an Automated Clearing House (ACH) to centralize the bilateral
arrangements for electronic transactions are being developed cooperatively.
The banks have indicated a willingness to develop an automated bill payment
system on the basis of cooperation between the banks and the State, while at
the same time developing bill payment options on a competitive basis for their
internet services. In Chapter 4, the issue of what initiatives should be taken
at the policy level in response to these developments is examined.
D. Branch Networks
3.36 As set out in Chapter 2, banking products have traditionally
been delivered through an extensive branch structure. Originally, such branches
would have worked as almost autonomous business units. In recent decades, and
particularly over the last ten years, the processing of payments and the provision
of credit has been increasingly integrated and centralized. That development
3.37 Changes in the role of branches in the period ahead are
likely to be closely linked to the emergence of other methods for the remote
delivery of banking services. The most significant fact already evident is that,
in some form, many banking transactions such as the arranging of loans, receipt
of cash, bill payments, card-based purchase transactions, payment of wages,
are already, to a large degree, centralized away from branches.
3.38 The likely scenario is that remote electronic delivery
will become at least as important as branch based delivery over the period ahead,
but that branches will continue to play a key role in the distribution of banking
products. The Groups own consultations suggested a view among industry
sources that this development will involve as many as 50 per cent of bank personal
customers using on-line financial services in five years and that almost all
business customers will be using on-line banking services. It is likely that
organizing the transition to this very different approach to the delivery of
banking services will increase the pressure for branch rationalisation and consolidation.
The geographical spread of branches has been changing in any event against the
background of a shifting pattern of population and economic growth.
3.39 All this suggests that it is likely that over the next
five years the significance of the branch for the bank-customer relationship
will be uncertain and changing.
3.40 Various options are open to the banks with regard to managing
their branch networks during this period. Much will depend on the degree to
which special arrangements can be made with other credit institutions, the credit
unions, the Post Office or even with other retailers to provide services. The
degree to which ATM systems can be upgraded and remote banking options successfully
exploited are also important factors. All these routes for the provision of
financial services would need to be tested in practice, but it is clear that
at the present time the development of electronic service delivery still has
some way to go before a full range of branch services could be delivered in
a customer-friendly way using these substitutes for bank branches.
3.41 In deciding between the options, banks will also undoubtedly
be influenced by their relationship with their own customers and investors,
with their staff and by their own strengths and areas of specialization. For
example, certain banks with particular strengths in cross-selling other financial
products are likely to see greater potential in focusing branches on marketing
a broader range of financial products.
3.42 The situation may be further complicated by the competitive
responses of certain banks and other financial service providers, such as credit
unions, to the approach taken by their competitors. In so far as there is branch
rationalization, an opportunity arises for selective opening of branches where
other credit institutions believe they have a more appropriate range of specialisations
to run a branch in a particular location, or where they believe a competitor
has pursued an incorrect strategy.
3.43 While some banks may adopt a conservative approach to
branch rationalization, it cannot be excluded that one or other of the major
banks would take a radical view and move to a policy of significant branch consolidation
sooner rather than later.63 These two possibilities raise the issue of whether
a policy response is required at this time to the possibility of major branch
rationalization. These issues are considered in Chapter 4.
54. For an overview of planned initiatives in this area see Financial Services: Implementing the Framework for Financial Markets: An Action Plan, Communication of the Commission, COM (1999)232, 11.05.99. Regulatory issues arising from technological developments are discussed in The Effects of Technology on the EU Banking Systems, European Central Bank, July 1999.
55. This report considers banking mergers: many of the considerations will also apply to bank/insurance company mergers or acquisitions which are also an option in the current market. Large European assurance companies have recently been involved in a significant number of cross border acquisitions within the assurance sector to build 'global brands'.
56. The ability to offer a range of products by one entity
57. For example, bewtween 1995 and the first quarter of 1998, there were 402 domestic mergers/acquisitions in the EU and 86 cross border mergers/acquisitions. The latter were almost all acquisitions rather than mergers. See Annex One, Section EIght, Possible Effects of EMU on the EU Banking System, ECB, February, 1999.
58. By the same token management issues can also improve important in preventing mergers taking place. See for example, P.III Portugese Banking & Finance Supplement, Financial TImes, 17/4/2000, in relation to the role of management differences in the abandonment of a proposed merger of two large Portugese banks.
59. Consolidation within the EU in the insurance sector has been motivated bu such considerations. National management structures have tended to remain in place. There is little statistical evidence to date of significantly increased profitability associated with this consolidation. See Financial Times World Insurance Industry Supplement, 28/4/00
60. One recent survey has found that 'For those banks with cross-border expansion plans, the prime motivation is to tap an enlarged geographical market and therefore customer base. Generation of critical mass in order to be able to utilise economies of scale and the opportunity tp leverag know-how between markets are of secondary importance at best. Diversification of risk does not seem to have had any influence whatsoever on the decision to expand abroad.' P25 The Strategic Impact of the Euro on European Retail Banks, Price Waterhouse/European Financial Management and Marketing Institute, 2000
61 P46 Institutional Investor, March 2000
62 A recent report from the Bank for the International Settlement concluded: '... the development of new payment products might open up new possibilities, but also carries the risk that a specific technology in which considerable investments were made could be rapidly rendered obsolete by new developments. Linked to this are the sometimes large investments needed for a large-scale rollout, whether at national or regional level. At the same time, the current rapid innovation of new payments products and quickly evolving technology has delayed an industry consensus in many other countries on standards or interoperability. Underlying these complex investment decisions is the uncertainty regarding consumer demand for new payment products.' P.20, Retail Payments in Selected Countries, Bank for International Settlement, September, 1999
63. It has been suggested to the Group that if one of the major banks were foreign-owned, that a more radical option might be more likely to be taken. It is difficult to assess this proposition. However, see Appendix Four for related points.
4.1 In this chapter the following policy areas are examined
in which issues arise in relation to the likely pattern of developments in banking:
§ Mergers and Takeovers Law
§ Competition & the Consumer
§ Retail Payment System
§ Promotion of Electronic Payment Mechanisms
§ Bank branches
§ International Financial Services Centre
Mergers and Takeovers Law
4.2 Given the prospect of increased merger and acquisitions
activity in Ireland and in Europe generally, it is desirable that the legislation
governing such changes in ownership should operate efficiently and should clearly
reflect the policy goals of the Government.
4.3 The Group identified two provisions of the existing legislation
governing changes of ownership within the banking sector in relation to which
there is a case for change. These are
- Section 1, MERGERS, TAKEOVERS AND MONOPOLIES (CONTROL) ACT, 1978: No. 17/1978;
- Chapter VI, CENTRAL BANK ACT, 1989 No. 16/1989.
Arising out of the changes which are proposed to these two pieces of legislation, the Group has also identified a requirement for consultation between the regulatory authority for the financial sector and the Minister for Enterprise, Trade & Employment. The reasoning for this is also set out below.
Mergers, Takeovers and Monopolies (Control) Act, 1978
4.4 There is currently an exemption from the Mergers, Takeovers
and Monopolies (Control) Act, 1978 in relation to any service provided by the
holder of a banking licence under section 9 of the Central Bank Act, 1971. In
practice, despite this explicit exemption, there is some uncertainty surrounding
the position of banks because of the wording of the legislation. It is quite
likely that any banks intending to engage in a merger to which the Act would
otherwise apply would comply with the provisions of the Act, for the avoidance
of doubt. The Group could see no reason why banks should be exempt from merger
legislation as it considers that this sector should be subject to the same scrutiny
in relation to ownership as applies to other sectors of the economy.64 However,
the Group did see a need for provision to be made to ensure that fast-track
approval of changes of ownership can be provided by the Minister for Enterprise,
Trade and Employment where the regulatory authority considers that this would
be appropriate. Also, provision should be made for consultation with the regulatory
authority for the financial sector so as to ensure appropriate liaison in relation
to the banking sector.
Central Bank Act, 1989
4.5 Under Section 77 of the Central Bank Act, 1989, the approval
of the Minister for Finance is required for any mergers involving more than
20 per cent of the banking sector. This legislation functions as an alternative
to regulation of banking sector mergers and takeovers under the general mergers
legislation. In practice, the existence of this provision means that any major
merger could be subject to two independent decisions by two Ministers. This
creates uncertainty. In the view of the Group, legislation should provide for
a single decision-making process in relation to banking mergers.
4.6 Neither of these changes would affect the requirement for
the regulatory authority for the financial sector to exercise a supervisory
role in relation to prudential issues arising from any proposed change of ownership
of a bank involving more than 10 per cent of its shares. Nor would it affect
the role of the Minister for Finance as the responsible Minister in relation
to the regulatory authority for the financial sector.
4.7 In summary, the Groups view is that,
a) with the prospect of increased mergers and acquisitions activity in Ireland and in Europe generally, it is appropriate that the exemption of licensed credit institutions from the provisions of the Mergers, Takeovers and Monopolies (Control) Act, 1978 should be removed. In that event, proposed mergers should be assessed by the Minister for Enterprise, Trade and Employment, and, where appropriate, the Competition Authority, in consultation with the regulatory authority to ensure compliance with competition laws and so that they are in the best interests of bank customers and the economy generally;
b) Section 77 of the Central Bank Act, 1989, which gives the Minister for Finance a role in the supervision of acquisitions of bank assets, should be deleted.
Common Good Considerations
4.8 Both the Mergers, Takeovers and Monopolies (Control) Act,
1978, as amended, and the Central Bank Act, 1989, make use of a concept of the
common good. The legislation provides some guidance as to the application of
this concept generally. However, the guidance provided within the legislation
is not exhaustive. Indeed, it implies that there may be common good considerations
other than those referred to in the legislation.65 The Group reviewed the application
of the concept of common good considerations to cross border banking sector
mergers and its consideration of this point is attached in Appendix 4. The main
conclusion is that the criteria applying to mergers generally are appropriate
for the financial sector, including cross border mergers in the financial sector,
and do not need to be supplemented. (This conclusion is based on recognizing
that prudential issues are dealt with by the regulatory authority for the financial
sector as a separate matter.)
Competition & the Consumer
4.9 It is the view of the Group that an efficient and competitive
banking system is in the best interests of individual bank customers and the
national economy as a whole. As set out in Chapter 2, the indications from the
available evidence are that, as regards personal lending and savings products,
banks in Ireland provide a generally competitive service to their customers.
The Group was not satisfied that it had sufficient information available to
it on the cost of borrowing for small business to draw a conclusion on the competitiveness
of the cost of this type of financing. The Group also recognized that it will
be important to ensure that small business in particular and bank customers
generally are receiving an internationally competitive banking service in the
period ahead during which the banking sector itself will be changing substantially
and during which the overall prosperity of the Irish economy will depend on
its competitiveness. Appropriate arrangements need to be made to ensure that
the regulatory regime for the banking sector gives a high priority to regular
monitoring and evaluation of the competitiveness of the banking sector as it
4.10 As part of its general reporting responsibilities,
the regulatory authority for the financial sector should be mandated to monitor
and report on competitiveness in the financial sector as it affects bank customers.
It is envisaged that such a report would provide data and analysis, including
internationally comparative analysis, on particular product segments of the
banking market (Mortgages, Overdrafts, SME lending, credit cards, etc.).
Retail Payment Systems
4.11 As shown in Chapters 2 and 3, until relatively recent times
the bulk of banking business has been transacted on paper-based systems which
are costly for banks and for their customers. The rapid development of technology
has already changed this dramatically and future developments will lead to an
acceleration in the process of change.
4.12 The key to change in the retail payments system is the
development of an electronic payment option for the bulk of commercial transactions
- business to business, business to customer, large and small value - and all
State payments. Banks are currently developing internet-based banking services
and developing the debit and credit card service they offer retailers. They
are also examining electronic purse technology options. Through
the payments system, operated jointly by the banks, they are working together
on examining the feasibility of setting up an automated clearing house (ACH)
and certification for electronic payments. In addition, they have made proposals
to the State in relation to aspects of the development of electronic payment
mechanisms. The current position in relation to this is set out in Appendix
4.13 The Group is supportive of initiatives to make the entire
payments system more efficient and believes it is important that they are progressed
with all possible speed. Bank customers (business and personal), the banks and
the banking system can achieve significant benefits from such development.
4.14 The Group did not become aware of any restrictive practices
significantly impeding access by providers of banking services to the payments
system. Nevertheless, it recognized that it will be important that access to
the payments system should not constitute an obstacle to competition in the
provision of banking services, and that there is a potential for technological
developments to create barriers to competition, depending on how they are developed.
Given the clear prospect of very significant change in the pattern of retail
payments, it was the view of the Group that this is a matter which requires
closer examination (and more extensive consultation with the industry) in order
that a robust conclusion can be drawn.
4.15 The Central Bank should carry out a full review
of the organization of the retail payments system and its report on this matter
should be provided to the Minister for Finance and published. Among
the issues to be considered would be the promotion of efficiency in payment
cycles, the issue of whether there should be greater transparency in the activities
of the retail payments systems and the role that the Central Bank should play.
The priorities in an Irish context are to ensure that appropriate investment
continues to be made in updating the system and that the level of access available
to the payments system does not constitute an impediment to new competitors
moving into the provision of financial services.
Promotion of Electronic Retail Payment Mechanisms
4.16 It was submitted to the Group that the structure of the
stamp duty on cards and cheques issued by banks is not consistent with a policy
of promoting electronic payments.
4.17 There is currently a IR£5 stamp duty charge on cash (ATM)
cards. This charge was introduced in 1992 at a rate of IR£2 per card and was
increased to the current rate in 1996. The duty is payable by the bank or building
society in respect of each cash card which is valid during their accounting
period. They may pass on the charge to customers. In addition there is a stamp
duty charge of IR£15 on credit and charge cards. This charge was introduced
in 1981 at a rate of IR£5 per card and reached its current level of IR£15 in
1992. There is also a stamp duty on cheques of 7p per cheque. The stamp duty
on cheques was last increased in 1984.
4.18 The yield from these taxes is as follows in 1999:
Cheques: IR£8.58 million[ 10.89 million]
Credit Cards: IR£12.12 million [ 15.39 million]
ATM Cards: IR£8.31 million [ 10.55 million]
It should be noted that these products are not subject to Value Added Tax (VAT). Discussions on applying VAT to financial services are ongoing at EU level.
4.19 However, there are two sets of charges applying to consumers
making use of payment mechanisms. Tax charges are one, but charges imposed by
banks are a second and more substantial set of charges. For personal customers,
paper transaction charges applied by banks are generally between 20p and 25p
per transaction, although in some cases exemptions apply. Leaving aside the
various exemptions, ATM and Laser transaction charges are somewhat lower in
a range of 17p to 22p per transaction. The stamp duty on credit cards is the
main initial cost in relation to credit cards because, as discussed in Chapter
2, most of the banks and building societies do not systematically charge annual
fees. However, some annual fees are charged under certain conditions and the
main disincentive to the use of credit cards is arguably the higher rate of
interest which applies to credit card borrowing than applies to overdraft borrowing.
4.20 The Group took the view that the gap between the charges
applied by banks for electronic and paper transactions could be the most significant
feature of the current charges regime in influencing customer preferences. The
differentials currently applied by banks do not appear sufficiently wide and
are not universal.
4.21 The Group noted that Corporation Tax rates have already
been reduced substantially and it is intended that they will be reduced further
to 12.5 per cent. This is leading to a substantial reduction in taxes paid by
banks which provides the banks with an opportunity, in their own commercial
best interests, to restructure charges to provide a better service to customers.
4.22 Part of the savings to banks from the restructuring
of Corporation Tax should be used to make electronic/automated banking transactions
more attractive to a wider range of customers while maintaining appropriate
charges for paper-based transactions. In the context of the banks having implemented
proposals on this, the Group recommends that the Department of Finance should
then consider the restructuring of taxation arrangements for payment mechanisms
with a view to promoting the move to more efficient (e.g. electronic) payment
systems without reducing the overall yield.
4.23 As discussed in Chapter 3, the Group has concluded that
there may be significant rationalization of branches, involving consolidation,
in the period ahead. The Group considered that this phenomenon has significant
public policy implications. However, the Group also recognizes that long term
commercially viable solutions need to be found. If branches are losing their
position as the predominant access point for retail customers, their numbers
will be reduced. In a situation in which new access points for the payments
system are emerging, in the interests of securing long term customer loyalty,
banks will have to manage change in such a way that access to the payments system
is not significantly reduced either in the long term or during the period of
transition to new access mechanisms. Short term expediency, which could lead
to the permanent withdrawal of the quantity and quality of services from geographic
areas leading to the long term loss of customers should be avoided. Once banks
are committed to that goal, they should be free to restructure and reorganize
branches and replace branches by other access methods in a manner which is consistent
with running efficient and up-to-date banking and payments systems.
4.24 The banking industry needs to develop a strategy
(whether involving agency arrangements with other non-bank retail outlets, electronic
arrangements or otherwise) to address the issue of maintaining appropriate mechanisms
for and levels of access (in all regions and by the different social groups)
to banking services in the context of possible future developments such as internet
banking, closure of branches and rationalization in the branch banking system.
The regulatory authority for the financial sector should monitor and report
on this from a customer perspective.
International Financial Services Centre
4.25 The Group reviewed the strategy outlined in the document
Strategy for the Development of the International Financial Services Industry
in Ireland. The strategy is based on the achievement of a set of specific
priority objectives, work on which is well in hand. The Group was satisfied
that no fundamental review of the strategy is required at this time. The Group
was also satisfied that the IFSC Clearing House Group structure which is currently
in place provides an adequate framework for the ongoing partnership process
which is required to ensure that the IFSC continues to function as a vibrant
part of the wider financial services sector in Ireland.
64. A similar view has been taken in the recent report of the Competition and Mergers Review Group. See Paragraphs 6.2.15 - 6.2.17, The Final Report of the Competition and Mergers Review Group.
65. This matter is discussed in Section 6.4 of the Final Report of the Competition and Mergers Review Group, May, 20000
Working Group on Strategic Issues Facing the Banking Sector
Noel OGorman (Chairman) [Second Secretary General, Finance Division, Department of Finance]
David Doyle [Assistant Secretary, Finance Division, Department of Finance]
Ann Nolan [Principal Officer, IFSC Section, Department of Finance]
Liam OReilly [Assistant Director General, Central Bank]
Tom OConnell [Head of Function, Central Bank]
Secretary: Richard Shine (November, 1999 - January, 2000)
[Assistant Principal, Finance Division, Department of Finance]
Martin Moloney (January, 2000 - July 2000)
[Assistant Principal, Finance Division, Department of Finance]
Submissions were received from the following:
Financial Services Industry Association
Irish Bankers Federation
Allied Irish Banks
Bank of Ireland
Irish Congress of Trade Unions/MANDATE/ Irish Bank Officials Association
Department of the Taoiseach
Department of Enterprise, Trade & Employment
Department of the Environment & Local Government
Where the Group considered it appropriate to explore issues further, discussions were held with some of the above and with the following:
EBS Building Society
Irish Life & Permanent PLC
Irish Business & Employers Confederation
Irish Payments Services Organization Ltd
The Competition and Mergers Review Group
The Competition Authority
The total number of financial entities for which the Central Bank has supervisory responsibility is of the order of 1,040, comprising:
Credit Institutions : 82
IFSC entities: 257
FINEX related entities: 81
(including 2 exchanges)
The Irish Stock Exchange: 1
Investment intermediaries: 592
Approved Professional Bodies: 5
In addition, at end-1999, collective investment schemes authorized by the Central Bank numbered 784 (1,966 including sub-funds).
The following is a list of institutions which currently submit returns to the Central Bank in relation to banking activities in Ireland.
indicates banks with headquarters in Ireland and subsidiaries of banks with Irish headquarters.
indicates banks with headquarters outside the State and subsidiaries of banks with headquarters outside the State.
Credit Institutions: Retail Clearing
[as at 31/12/99: Deposits from Non Government/Non Financial Irish Residents: IR£27.7 billion
Credit to Non Government/Non Financial Irish Residents: IR£30.6 billion]
*Allied Irish Banks plc
*The Governor and Company of the Bank of Ireland
#National Irish Bank Limited
#Ulster Bank Limited
Credit Institutions: Non-Clearing with Predominantly Domestic Business
[as at 31/12/99: Deposits from Non Government/Non Financial Irish Residents: IR£23.9 billion
Credit to Non Government/Non Financial Irish Residents: IR£31.0 billion]
#ABN AMRO Bank N.V.
*ACC Bank plc
*AIB Capital Markets plc
*AIB Finance Limited
*Anglo Irish Bank Corporation plc
*Anglo Irish Corporate Bank Limited
*Ansbacher Bankers Limited
#Associates Capital Corporation plc
#Bankers Trust International plc (BTI)
#Bank of America NT & SA
*Bank of Ireland Finance Limited
#Banque National de Paris S.A.
*EBS Building Society
#Equity Bank limited
#FCE Bank plc
*First Active plc
*Guinness & Mahon (Ireland) Limited
#HFC Bank plc
*ICC Bank plc
*ICC Investment Bank Limited
*ICS Building Society
#IIB Bank Limited
#Investec Bank (UK) Limited
*Investment Bank of Ireland Limited
*Irish Life & Permanent plc
*Irish Nationwide Building Society
#Lombard & Ulster Banking Limited
#Marks & Spencer Financial Services Limited (MSFS)
#MBNA International Bank Limited
#National Irish Investment Bank Limited
#Northern Rock plc
#Ulster Bank Markets Limited
Credit Institutions: Non-Clearing with Predominantly Foreign Business
[as at 31/12/99: Deposits from Non Government/Non Financial Irish Residents: IR£4.6 billion
Credit to Non Government/Non Financial Irish Residents: IR£7.5 billion]
#Artesia Banking Corporation
#Banca Commerciale Italiana (Ireland) plc
#Banque Bruxelles Lambert
#Banque Internationale a Luxembourg
#Bank of Montreal Ireland plc
#Bankgesellschaft Berlin (Ireland) plc
#Barclays Bank plc
#Bear Stearns Bank plc
#BW Bank Ireland plc
#Caja de Ahorros y Monte de Piedad de Madrid
#Chase Manhattan Bank (Ireland) plc
#Citco Bank Nederland N.V.
#Commerzbank Europe (Ireland)
#Commerzbank International (Ireland)
#Credit Local de France
#Daiwa Europe Bank plc
#DePfa-Bank Europe plc
#DePfa-Bank AG/ Bauboden
#Deutsche Bank/DB Ireland plc
#Dresdner Bank (Ireland) plc
#Eurohypo European Mortgage Bank plc
#Europaische Hypothekenbank S.A.
#Fimat International Banque
#Garras Bank - Naspa Dublin
#Helaba Dublin Landesbank Hessen-Thuringen International
#Hewlett-Packard International Bank Limited
#HSBC Bank plc
#ING Bank N.V.
#KBC Bank N.V.
#KB Luxembourg Finance Dublin
#LGT Bank in Liechtenstein (Ireland) Limited
#Merrill Lynch Capital Markets Bank Limited
#Pfizer International Bank Europe
#Rabobank Ireland plc
#Rheinhyp Bank Europe plc
#Sanpaolo Bank Ireland plc
#Scotiabank (Ireland) Limited
#SGZ-Bank Ireland plc
#Societe Generale SA
#Unicredito Italiano Bank (Ireland) plc
#Westdeutsche Landesbank (Ireland) plc
#WGZ-Bank Ireland plc
Common Good Considerations with regard to cross border banking sector mergers and acquisitions
A4.1 Mergers legislation envisages that there are common
goodconsiderations which may be taken into account in assessing whether
a proposed merger or takeover should be permitted. The Act lists such factors
and the matter has been discussed by the Competition and Mergers Review Group.
A4.2 In general the factors which apply in relation to banking
will be the same as those which apply to other sectors. This Appendix considers
whether cross border mergers and takeovers raise particular issues which require
A4.3 Some banks operating in Ireland are already foreign owned.
The transfer of ownership of, for example, another 10 per cent of the Irish
banking market out of the country would not have any immediate or direct consequences
for concentration in the Irish banking market. The main issue would be how the
management of that bank was organized.
A4.4 There was a view among many of those consulted by the Group
that the maintenance of headquarters decision-making functions by banks within
Ireland was a common good consideration which should be taken into account,
where appropriate, in considering proposals for change of ownership of major
A4.5 In particular, there appear to be four areas where a change
of ownership from domestic to foreign could lead to a review of policy by the
- provision of payment services to a broad range of customers, not all of whom are profitable when considered individually
- location of specialized staff, particularly in treasury and centralized support systems for retail banking,
- the approach to be taken to cooperation by the bank with the State where this would facilitate overall management of the Irish economy,
- involvement in co-operation with the State in industrial development promotion.
A4.6 The likely outcome of reviews of these issues by management
in the event of a cross border merger or takeover cannot be predicted. Management,
based outside Ireland, may well draw the same conclusions that have been drawn
by current bank management based in Ireland as to the balance of the best interests
in Ireland of their shareholders. Even where an Irish bank is taken over by
a foreign bank, structures may be put in place, such as a local board and a
substantial policy-making function at national level, which would facilitate
the formulation of policies sensitive to specific characteristics of the Irish
economy. On the other hand, it is possible for international banks to take the
opposite view and seek to operate a single business model across national borders.
Such a model may involve a significant change in aspects of the approach of
banks to the marketplace in Ireland and, consequently, to a reduction in the
availability of banking services in Ireland.
A4.7 A proposed purchase of a domestic bank by a foreign bank,
therefore, creates a risk of negative consequences for the Irish economy
overall. This risk may never be realized. However, on the grounds that unnecessary
risks should not be taken on, it could be argued that the existence of this
risk would suggest that there may be some justification for a public policy
of discouraging such takeovers. There are two problems with that view:
firstly, what price is Ireland willing to pay in order to avoid such an unquantifiable risk that foreign takeovers might lead to negative results for the domestic economy overall ?
secondly, can such an approach be reconciled with the wider policy framework for the development of the Irish economy ?
A4.8 Taking the first point, a concomitant of discouraging foreign
takeovers of Irish banks would be a greater willingness to facilitate mergers
between domestic banks. One argument for allowing increased concentration in
the Irish banking sector might be that the Irish economy needs domestically
headquartered banks and that the only way to ensure that is to allow a single
dominant domestic bank to emerge.
A4.9 The Group was generally sceptical of the advantages of
a public policy of promoting or facilitating the emergence of a single dominant
domestic bank. The Group did not identify any sustained long term benefit, in
the current environment, for the Irish economy from the emergence of such a
bank. In particular, it noted that a merger of two major domestic banks would
almost certainly not act as an obstacle to a takeover of a major Irish bank
by a foreign bank because of the small relative size of all the participants
in the Irish banking market, even if merged.67
A4.10 Secondly, as outlined in Chapter 2, Irelands approach
to the ownership of banks is subject to the EU single market regulatory framework.
Significant mergers or acquisitions of Irish banks will fall under the relevant
EU Directive and will be considered by the EU Commission, rather than by national
authorities. This reflects the fact that a merger or acquisition of the larger
participants in the Irish banking market could exceed the thresholds set down
in the EU directive, while any transaction involving either of the two main
banks would be unlikely to benefit from the exception for mergers and acquisitions
where two thirds of the business activity is concentrated in one member country.68
A4.11 This situation in which mergers involving major domestic
banks are subject to supranational rather than national regulation reflects
the fact that Ireland is committed to the policy of the promotion of the development
of the Irish economy within a single European market. Irelands commitment
to the development of the single European market is consistent with a calculation
that the disadvantages which may arise from foreign ownership of, for example,
banks trading in Ireland will be more than offset by the benefits arising from
the integration of the European economy on the basis of efficiencies achieved
on a Europe-wide basis.
A4.12 In addition, a cross-border merger or takeover would be
likely to be part of the modernization and development of the banking sector.
In many cases, improved efficiency, a broader range or improved quality of financial
services could well be created by such a cross-border merger or acquisition.
These benefits for customers are an important consideration.
A4.13 All these considerations mean that common good
considerations arising in relation to foreign ownership of Irish banks should
only be reflected in a manner consistent with the wider policy goals and commitments
of Ireland and in line with overall competition policy.
A4.14 That suggests that where the domestic regulatory framework applies, common good considerations as they apply generally should be considered by the Minister for Enterprise, Trade and Employment. Where the EU regulatory framework applies, a structure should be put in place now for consultation between the Department of Enterprise, Trade & Employment, the Competition Authority and the regulatory authority for the financial services sector to establish how such proposals will be handled domestically, including the Irish input to the EU Commission decision-making process.
66. See P.42, Mergers Discussion Document, July 1998 and P.223-224, The Final Report of the Competition and Mergers Review Group, May, 2000
67. See Statistical Appendix Table 1.
68. The large and increasing proportion of the activity of the two main banks carried out abroad would be relevant in this regard.
Development of Electronic Payments
A5.1 In July, 1998, AIB Bank and Bank of Ireland proposed the
establishment of a group to examine the payments system. The banks stated that
in relation to payments, "Ireland is out of line and lagging behind".
The banks argued that "The dynamics of the payments system are such
that the banks alone cannot bring about the conditions necessary for change.
The banks can create the core infrastructure of an electronic payments system,
but a successful National Payments Strategy can only be successfully implemented
through cooperation of all the key players, with government playing a significant
A5.2 Section 30 of the Government Action Plan Implementing
the Information Society in Ireland requested the financial institutions
to prepare proposals for appropriate systems to facilitate further development
of electronic payments in the economy.
A5.3 The Irish Payment Services Organization (IPSO) formally
made proposals to the Taoiseach and the Minister for Finance in October 1999.
They proposed an approach in which "the banks and other financial institutions
would have a shared vision, shared standards, shared infrastructures, shared
A5.4 The proposed National Payments Strategy includes:
- electronic regular bill payments
- a universal payments account
Electronic Regular Bill Payment Service
A5.5 The proposed utility bill payment initiative has three
to truncate the bill payment process by eliminating the requirement on those not using direct debit instructions to use cash or cheques to make bill payments
to make it possible to send bills to customers by E.mail who have an E.Mail facility.
to produce aggregate bills thus saving on postage and administration.
Pilot schemes are being developed to push this project forward.
A5.6 The second proposal is for the establishment of a universal
account to make it possible for each adult to make use of electronic payments
technology. Access to this account would be card-based, with access through
Automated Teller Machines and retailers. The universal account would
be made available on a non-competitive basis to each adult. These accounts would
be managed centrally by an arm of the State or by the central payments system
companies on a not-for-profit basis. They would be financed by charges levied
for social welfare and salary payments made to the accounts.
A5.7 A Group based in the Department of the Taoiseach is currently
in discussions with the Irish Payment Services Organization to develop greater
clarity as to how the proposals would operate and with a view to identifying
the full range of issues which arise.
A5.8 Amongst the issues identified to date are:
the need for easy access to and participation in any such "universal account" type of arrangement by citizens;
cultural and societal acceptability of the proposals;
the right of all financial institutions to participate in electronic payment systems;
the need for the financial institutions to cooperate more closely in the area of electronic payments and clearing systems;
the role of An Post in any new arrangements;
the extent of support among the utilities for the proposed central billing arrangements;
the administrative costs associated with the proposed arrangements (and how they are to be met);
transitional arrangements (including possibility of dual systems being needed and cost implications);
the need to establish a "critical mass" of participation before the proposals become viable;
identifying the range of options regarding a gradual move to electronic payment of Government payments;
the need for discussion with the social partners, particularly regarding salary payments;
It is expected that these issues will be addressed in the group's report, along with such other issues as arise during the course of the group's work.
A5.9 The recently concluded Programme for Prosperity and
Fairness includes a commitment that a group which includes representatives
of the social partners will examine means of facilitating greater use of electronic
Asset of Banks in Ireland
Table 1: European Commercial Banks: Total Assets
% of Total
% of Total
Source: Banking Federation of the European Union/Banking Business:Abstract of Statistics, Vol.16, 1999, British Bankers Association.
1. Separate figures for commercial banks not available. 2. Banking sector as a whole. 3. Banks with a working capital above DKK100m, excluding Faroese banks and branches of foreign banks. 4. Domestic Operations only. 5. Private commercial banks excluding mortgage banks and home loan and savings associations. 6. Commercial banks and savings banks, excluding rural and artisanal banks and central institutions. 7. Consolidated figures, including foreign operations. 8. Banking sector as a whole. 9. Also includes Finland, Greece, Iceland, Luxemburg, Norway, Portugal, Switzerland.
Table 2: Assets of all Credit Institutions resident in Ireland
of Total Assets
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