Fianna Fáil Finance spokesperson Michael McGrath has pledged the party will take action to tackle the lack of competition in the banking sector in Ireland.
As the banking sector has contracted, the dominance of the two pillar banks, Bank of Ireland and Allied Irish Banks, is again apparent. This lack of competition is leading to high costs for customers in terms of interest rates and fees and charges. It is also inhibiting product innovation.
According to the most recent report ‘Costs of Doing Business in Ireland’ from the National Competitiveness Council, compared to the European average, “New business interest rates are 60% higher for loans up to €1 million and are 81% higher for loans above €1 million. In 2014, loans of over €1 million are 81% more expensive in Ireland.” There is also clear evidence that this is replicated in the personal finance market with high standard variable mortgage rates and excessive fees and charges.
Deputy McGrath commented “Personal and business customers are paying the price of the very weak level of competition in the Irish banking sector. If AIB is gradually returned to the private sector over the next five years, it is vital that there is a parallel strategy to ensure that a dynamic banking sector is in place.
“Fianna Fáil is outlining a range of measures across the SME and personal sector to tackle the lack of competition:
New entrants: Just as IDA Ireland actively markets Ireland as a destination for multinationals to locate, we need to ensure the State encourages overseas banks to establish a domestic presence in Ireland. A number of financial institutions already undertaking administrative functions in the IFSC should be encouraged to offer services to Irish based retail customers.
State Back Investment Bank: A full State Enterprise Bank has the potential to be a permanent solution to the lending gap which exists in Irish banking. It would lend to any company, regardless of sector or size, provided it can demonstrate its creditworthiness. It would remain in State ownership even if the State disposes of its stake in Bank of Ireland / AIB. This was promised by the current government but only partially delivered in the form of the Strategic Banking Corporation of Ireland which has had very limited impact to date.
Legacy debt issues: One of the reasons for the lack of new lending in the SME sector is the overhang of legacy debt. In most cases, SMEs are generating an operating profit but many are making an overall loss due to the cost of servicing its historic debts. Banks are only very slowly disengaging from short-term forbearance measures. Once sustainable cash flows have been determined, options such as right-sizing the level of serviceable debt and the disposal of non-core assets can be considered. We will require the Central Bank to publish updated targets for dealing with SME debt and ensure these are extended beyond the State supported banks.
Skills levels: The report by Bain/IIF into European SME financing found that one impediment to SME lending in Ireland was that banks lacked the skills to gauge the creditworthiness of businesses. We will ensure that the Central Bank closely monitors the skills levels within banks to ensure that they are adequately resourced to assess.
Code of conduct on mortgage switching: The Central Bank has a successful code in place for the switching of current accounts from one financial institution to another. The same now needs to be done for mortgage holders who wish to switch their mortgage. A statutory code on mortgage switching would set out in detail the obligations on financial institutions involved in a mortgage switching transaction. A strong code would provide certainty to mortgage holders about the process involved and ensure the mortgage holder’s rights are protected.
Standard variable rate mortgages: The legislation we are proposing is balanced between the obvious need for banks to be profitable and the rights of consumers to be treated fairly. The Central Bank would be given responsibility for monitoring the level of competition in the mortgage market and the fairness of rates charged. This would act as a strong deterrent to banks from charging excessive rates and would only necessitate Central Bank action where the evidence points to a clear market failure. It would empower the Central Bank with a range of tools, including interest rate caps, to influence the standard variable rates charged.
EBS: As consideration is given to gradually disposing of shares in AIB, we will examine the feasibility of EBS being sold separately as a mortgage bank. This would acknowledge the fact that the loss of the Building Societies has had a long term negative impact on the mortgage market.
Credit Unions: We will ensure the Credit Unions can compete on a fair basis by amending Section 35 of the Central Bank Act which places an undue restriction on longer term lending by credit unions. We will conduct a full review of the implementation of the recommendations of the Commission on Credit Unions and will ensure that an agreed strategy is put in place underpin the growth and development of the movement.”