Ireland’s banking sector is willing to innovate and adapt but must follow the example of countries like Germany and France which have much lower capital reserve requirements. a leading industry figure has argued. The sector must do this in order to become more competitive and attract more players into the market.
Brian Hayes, chief executive of the Banking and Payments Federation Ireland, said Ireland wasn’t the only country in the euro zone undergoing dramatic change in the banking sector with the departure of Ulster Bank and KBC from the retail market, but it was distinguished by a number of features.
Mr Hayes said that the extent of change in the sector in Europe since 2008 was evident by a drop in the number of banks from 3,000 to just over 2,000, a drop in the number of branches from 200,000 to just over 100,000 and a cut in the number of employees from 22 million to 17 million.
And he told the Dublin Economic Workshop in Wexford that while the exit of Ulster and KBC had reduced the retail sector to just three pillar banks, people should remember there remained a wholesale bank sector accounting for 40 per cent of Irish bank employees.
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However, Ireland was notable in that as a result of the banking crisis of 2008 Irish banks were understandably subjected to more stringent requirements so that Irish banks must retain capital reserves of 5 per cent of their loans compared to a figure of just 2 per cent in banks in Germany and France.
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Mr Hayes said that while interest rates across Europe have been at an unprecedented low until recently, one of the reasons that Irish interest rates were higher than elsewhere was the high level of risk attached to Irish loans due to the historical legacy of the banking crisis over a decade ago.
However, the establishment of Macroprudential Rules on borrowing by the Irish Central Bank in 2014 had led to a very conservative loan book and Irish banks were not at the same level of risk that they had been in 2008 when they engaged in bad lending and people engaged in bad borrowing.
The introduction of Macroprudential Rules had been a big improvement but there were also differences between Irish and European banks in terms of securitised lending which meant it took an Irish bank on average 44 months to repossess a house compared to just eight months in the UK.
Mr Hayes said the other notable difference between Irish and European banks was that Irish banks got 80 per cent of their income from interest as opposed to fees whereas European banks only derived 54 per cent of their income from interest payments.
However, while bank activity in the euro zone was down from approximately 60 per cent of financial transactions in 2008 to approximately 45 per cent now, with other institutions getting involved in, for example, the mortgage market, Irish banks remained centrally involved in Irish financial activity.
Mr Hayes said the Irish banking sector last year added €11.6 billion to Ireland’s GDP and Irish retail banks contributed €1.6 billion directly to the Irish exchequer. Irish householders have €1.89 billion on deposit with Irish banks and banks have some €152 billion on loan with Irish homeowners.
He said each day Irish banks processed €3.7 billion, while the banking sector remained a significant employer with some 22,000 employees. Some 14 years on from the banking crisis and Irish banks have repaid 83 per cent of money that they received in support from the State.
“There is an opportunity post-Covid for the Irish banking system to come to a more profitable position – the banking sector has continued to change and adapt and notwithstanding the historical legacy issues we face on capital and regulation, I think over time we can resolve those difficulties.”
