Banking: Still a Source of Rip Off?

IMMEDIATE ACTION VITAL BEFORE ANOTHER STUDY BEGINS.

1. There is no history of pro-consumer regulation in the Irish banking sector. Over the years, the Central Bank has had too cosy a relationship with the commercial banks. It has always been more interested in a 'sound' banking sector than one which was keenly competitive for the consumer. As a result,it has been comfortable with fat profit margins in the banks and has not seen these as an indicator of something being amiss for consumers.



2. The National Competitiveness Council, set up by the Rainbow Government in 1997, has taken a far more critical approach. They have highlighted that the mark up taken by the banks is one of the highest in the EU. Only two countries have a higher mark up. On average Irish Banks take a 35 higher mark up than the rest of the EU.



3. There can, of course, be two reasons for higher mark ups. One is poor efficiency. The other is higher profit taking. It is pretty clear that the Irish banks have been able to generate far higher margins of profitability than banks elsewhere in Europe. An interesting report by Davy Stockbrokers has highlighted this point. Since 1997, the value of Irish bank shares has increased by over 70. This is three times the gains recorded by banks quoted on the London Stock Exchange. These gains were achieved at a time when the rest of the Irish stock exchange experienced substantial losses. Davy Stockbrokers found that the return on equity achieved by the Irish banks are well out of the ordinary. They reckon the excess is running to about 10-12 per annum since the mid-1990s. Clearly the banks have been able to make big killings during the boom times.



4. As international conditions have got tighter, the European Central Bank has cut interest rates from 4.75 to 2 in an effort to boost the flagging European economies. While big business and mortgage holders have been able to get mostof the benefit of those cuts passed on, only half of the benefits has been passed on to smaller business borrowers and to personal borrowers. The representatives of small business are rightly incensed by this pattern. Unfortunately, it has been much harder for the voice of the ordinary consumer to be heard.



5. The reality of banking in Ireland is that some segments are much more contestable by competitors than others and forces down mark ups. If an Irish bank is competing for the business of Coca Cola, it cannot have high mark up because these companies can shop around all the financial centres of the world. It is a very different matter if you are trying to run a corner store or are trying to raise a personal loan.



6. The mortgage market provides an interesting lesson. In 1999, the Irish financial institutions upped their mark up on mortgages from 1 to 2.5. The Bank of Scotland moved in aggressively when it saw this ripe cherry fit for picking. Quickly the mark up came back down to 1.25



7. In dealings with small business or personal borrowers, where the financial institutions have very clearly pushed up their mark ups, and no white Knight has come in to assist.



8. The challenge is to make these market segments more contestable so that mark ups are forced down. Attention has rightly focussed on the cosy club that operates the clearing system. The Central Bank has been part of this club but once again it seems that the interest of consumers hasn't been much on its mind. New entrants,like the Bank of Scotland, complain that in order to join this,they are going to be charged a substantial entry fee which is supposed to the other club members 'the sum cost' of their investment over the years. There does not seem to be proper transparency in the setting of these entry requirements and the competition authority must certainly ensure that this is cleared up. The clearing system should be operated like a telecoms network where anyone who wants to use it can freely do so subject to charges that provide a level playing pitch.



9. It is also important that consumers are facilitated in shopping around. While, no doubt,the banks have created obstacles to people moving their accounts,the Government is equally a culprit. In the last budget,it massively raised the charge on consumers for operating a credit card at one stroke increased the average bank charge paid by consumers by 24! In addition, the rules of this charge mean that if a consumer seeks to switch his/her bank to get a more competitive deal elsewhere,the Government will insist on a full annual levy being paid by the consumer in both banks. Once again, the Government talks about encouraging competition but by its actions,frustrates it.



10. Last year,the Government forced through legislation which placed the consumer director for financial institutions directly under the thumb of the Central Bank/Financial Regulator. No other European country operates in this fashion. Consumers are rightly concerned that once again the protection of the consumer will play second fiddle to the Central Bank's greater interest in seeing a highly profitable Irish banking sector.



11. We have had a number of Government sponsored investigations of the banking sector in Ireland over the years. Few have resulted in effective action to support the consumer. The investigation by the Competition Authority has to be welcomed. However, people will be forgiven for thinking that with this Government, we are always one review away from action.



12. What can the Competition Authority do to make a serious difference? It should move immediately to have a Code of Practice imposed on Banks requiring them to have a smooth system for customers wanting to switch their business. Rules should also govern permissible sue of existing customer to sell other products. In such a highly concentrated market with the big 2 banks holding over 75 of the market such captive selling can seriously damage the emergence of new competition. The Clearing System should be subject to fair access rules. Its management by a club of insiders should be independently regulated or brought to an end. All of this can and should be done without a further study.



13. Will this package be enough to deliver cheaper banking in the segments where the banks are now sheltered from competition? The study over the next 12 months should monitor its impact. If it fails, more radical approaches will have to be examined.



14. In other jurisdictions excessive market power in some market segments have been tackled by requiring the dominant players to divest themselves of some of their market share to smaller players or new entrants. This option needs study in Irish Banking. The Big 2 have already mooted a merger in order to provide a combined Irish Banking Force able to compete internationally. This would create total dominance in the domestic market, which could not be countenanced. However, a policy of divesting market share at home, could allow the authorities contemplate such a merger. The Competition Authority can provide important insights into these issues. However action,which can be taken immediately must not be delayed while useful further study proceeds.

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