Irish banks and building societies have had much better years. In 1999 they got their first real taste of competition as foreign banks chased their customers. The Public Accounts Committee also produced a damning report on the sector castigating senior management for years of inaction and deceit when it came to collecting DIRT tax for the Exchequer.

The sector is facing into a radically new environment in 2000. Already it is clear the State's financial institutions will have to learn to live with much tighter profit margins and the challenge for the future will be to increase profits from a lower cost base.

Bank of Scotland's debut in the Irish market during the summer triggered an unprecedented shake-up in the mortgage market. The bank undercut the rate of interest being charged to Irish mortgage-holders by almost 1 percentage point and forced the Irish institutions to match it. As a result, the banks and building societies drew the ire of customers and the Minister for Finance for the exorbitant rates of interest they had charged before Bank of Scotland's arrival.

While the banks had all been expecting a foreign rival to chase the mortgage market, former UK building society, Northern Rock's entry into the savings market a couple of months later took the sector completely by surprise.

Northern Rock introduced the highest paying deposit accounts for savers who want free access to their money. To date Ulster Bank is the only institution to follow its lead and was forced to withdraw this product from the market almost a week after its introduction because of the huge response from its customer base. All of the other institutions insist their customers can avail of interest rates similar to Northern Rock's on fixed-term accounts and are resisting the latest competitive pressures.

But the assault on the Irish institutions' core mortgage and savings base, which is expected to intensify over the years, will have far reaching implications for the sector.

The adoption of the euro in 1999 has effectively made it easier for overseas banking groups to establish a low-cost presence in the Irish market. Most analysts suggest it is just a matter of time before other larger UK and European players offer telephone and electronic banking products in this market at rates which will be attractive to customers here.

First Active, the EBS and Irish Nationwide building societies are considered the most vulnerable in the face of intense competition and will have to seriously tackle their costs base if they are to survive.

First Active has already outlined its cost-cutting measures which, it says, if fully implemented, will trim €13 million (£10.24 million) off its cost structure annually. Bank of Ireland has also announced it is seeking cost savings of €65 million, which will include up to 700 redundancies, to be achieved over three years. It seems certain that other financial institutions will make similar announcements in 2000.

Consolidation within the financial sector was a feature of 1999. The biggest link was forged between the Republic's biggest mortgage lender, the Irish Permanent and the largest life assurance group, Irish Life. That union has been largely bedded down and Irish Life & Permanent has since submitted a bid to buy part of Ulster Bank's retail operations. Its desire to become one of the main clearing banks will be its focus this year with its bid for Ulster the most straightforward way of achieving that end.

Ulster Bank has been put up for sale by its UK parent NatWest as part of its efforts to raise funds to fend off hostile bids from Bank of Scotland and Royal Bank of Scotland. This represents a further shake-up in the Republic's retail banking market.

Ulster Bank's management and staff are pushing for the bank to be floated on the Dublin and London stock markets as an alternative to a trade sale although most analysts believe the bank will ultimately be bought by another institution. Up to 10 banks are understood to have submitted a bid for the bank to NatWest. These include AIB and a joint bid by Irish Life & Permanent and Bank of Ireland.

Bank of Ireland's interest in Ulster relates to its Northern Ireland branch network. The Republic's second-biggest bank has made no secret of its desire to become a bigger player in that market and will be hoping the joint bid will be successful. Overall Bank of Ireland has had a pretty hectic year on the acquisitions front - although most attention focused on its failed attempts to expand in the UK and more recently to buy the State-owned ICC Bank.

Bank of Ireland's plan to merge with the former British building society, Alliance & Leicester, turned into a nightmare after details of the deal were disastrously received by the stock market. The most damaging aspect, as far as the major fund managers were concerned, was that Bank of Ireland was willing to cede overall control of the enlarged group's business to A&L's chief executive. Its share price nose-dived on the back of huge negative sentiment to the link which was eventually aborted.

This month the bank withdrew from the tender process to buy ICC Bank. Bank of Ireland had always been considered as the front-runner to buy the specialist bank and ended up as the only bidder after it was advertised for sale by the Government. At the end of the due diligence examination, Bank of Ireland refused to pay more than £200 million (€254 million) which was well below the £350 million expected by the Government, and the sale was aborted.

The outlook for ICC remains uncertain and it now seems clear that its staff and unions will have to consider pursuing options which will make it a more attractive prospect for a buyer in the future.

The other state bank, ACC had its future linked with TSB Bank in 1999 although plans to merge the two banks and float on the stock market in May look less certain now. The flotation option is almost certainly unlikely to go ahead in 2000 with some analysts suggesting the merger may yet also come apart amid further industrial unrest.

AIB made further strides in expanding its international businesses during the year but it was speculation about the extent of its potential DIRT liabilities and its performance at the PAC's DIRT Inquiry which kept the bank in the headlines. The bank became the first international group to take a strategic interest in a Singapore bank and seems well positioned to make further strides there in the future. It has also extended its presence in Poland.

In 2000 AIB will want to put an end to the adverse publicity generated by the PAC although its long-running dispute with the Revenue Commissioners in relation to a DIRT amnesty, which the bank claims to have secured in 1991, seems to be heading for the courts for resolution.

National Irish Bank once again found itself under the media spotlight amid revelations that it wrote-off a £250,000 loan for the Sligo Leitrim Fianna Fail TD, Mr John Ellis in 1989 when he was facing bankruptcy and had massive debts to farmers. The bank rejected suggestions it had bowed to political pressure in doing this but had to face some harsh criticism from the farming community.

There is no sign that the considerable pressures which visited the Irish financial sector will abate in 2000. The sector is likely to be hit for massive tax demands from the Revenue as a result of the PAC's findings. It will also have to contend with further international competition and will have to look seriously at how to deliver its banking services in a more efficient way.