Return of the Banking Cartel


With the publication of The Financial Measures Programme or, by its more popular title, “the banks’ stress test”, the Irish government and regulators will hope to have (finally!) drawn a line under the escalating estimates for recapitalising and salvaging what remains of our bankrupt financial system. Such is the level of conservatism of the assumptions behind the test that the authorities would have us believe (at the fifth time of asking) that all adverse loan scenarios are more than catered for and that the final figure of €70 billion really is the last word on the subject.

On the face of things as per the highly detailed report this seems to be the case and – if €70 billion in taxpayer funding can ever be a source of comfort – this is something to be welcomed. But the wider aspects of the report give cause for concern: in particular the proposed restructuring of the banking system into a “two pillar” system – the pillars in question being Bank of Ireland and AIB Bank (now in the process of being rushed to the altar with EBS in its arms). With the demise of Anglo and Irish Nationwide and the departure and retrenchment of much of the foreign retail banking element, the implications for bank competition are severe.

This is particularly the case when viewed in tandem with the rise of 0.25 percent in the ECB rate – something passed on to borrowers with the usual alacrity. That this is widely expected to be the first of a series of increases will be bad enough but, taken in tandem with the reality that we now have a return to the bad old days of the banking cartel, the implications for consumers and business are ominous.

You don’t need to be particularly old to recall the routine gouging that was the practice back as late as the mid-1990s before the entrance of foreign competitors and then a burst of crazy price competition at last gave customers something to cheer. Back then, Irish banks enjoyed some of the highest retail banking margins in the world and, with the tacit approval of government and regulators, it looks like they may well do so again at the same time as interest rates move north.

Certainly no-one could take any comfort from the recent interview of Matthew Elderfield on Prime Time that came in the wake of the report’s publication. Asked about the banks’ exposure to tracker mortgages and their efforts to persuade customers to move off these perpetual loss-makers, the top man at the Financial Regulator was clear: “Trackers are a problem for banks that provided them because they are costing the an awful lot of money.”

Elderfield, however, wisely stopped short of recommending that banks stop providing trackers and called on them to honour their obligations to customers but was emphatic that they needed to get their pricing right in future.

The implications of “getting their pricing right” are obvious. The fact is that from now on as the duopoly attempts to rebuild their balance sheet through profitability, the Irish consumer will be progressively fleeced. For the reality is that bank balance sheet health can only come from two sources: the customer or the taxpayer. And, given that the taxpayer is down some €70 billion so far it seems certain that political expediency will lead to politicans preferring that bankers take the rap for fat margins rather than contemplate any more announcements of fresh capital injections.

The horrific scenario is that given the current make-up of the Irish mortgage market, an increase in 1 percentage point in bank margins would be catastrophic for many households in the state. But that is what banking cartels do and have traditionally done in this country, regardless that such pricing would probably be self-defeating as it would tip so many mortgage holders over the edge.

It is worth comparing things with the UK where the Independent Banking Commission has just published its interim report. One large part of its remit is the engendering of competition in that jurisdiction where the market share of Lloyds Banking Group, which holds some 30 percent of current accounts following its takeover of HBOS, is seen as totally unacceptable and the proposed disposal of 600 branches deemed not nearly enough.

This country is going in the opposite direction with virtually the entire market carved up between the two “pillars”. The consequences for the bank customer will be expensive to say the least.

Top Judgments Registered

11.11.2020

Urban Green Private Limited
Address: R/o Atkins Hall, River Towers, Lee Road, Cork
Amount: €734,547.90

10.11.2020

Thomas O'Brien
Address: Castlegrace, Clogheen, County Tipperary
Amount: €93,749.13

10.11.2020

Margaret O'Brien
Address: Castlegrace, Clogheen, County Tipperary
Amount: €87,979.01

06.11.2020

Sean Browne
Address: 24 Woodlands Avenue, Arklow, Co Wicklow
Amount: €38,094.60

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