Banks got a taste of the valuations they can expect in the more competitive world of profit margins that they now face.

The rapid and dramatic response to the arrival of Bank of Scotland's 3.99 per cent challenge to mortgage lenders in the Republic was rewarded with a scything cut of between 5 and 6 per cent in stock market value of the State's two largest companies when the Irish exchange opened for business on Monday, the first session since the major lenders move. By the end of the week those losses had grown.

The banks' rationale in matching the Bank of Scotland rates was to clamp down firmly on the competition at the outset. The logic, presumably, is that once they are successful they can revert to the informal cartel which has operated among Irish lenders heretofore.

The fault in the argument is that even if Bank of Scotland were to be scared off, which is unlikely, someone else is likely to mount a fresh challenge. The plain fact is that Irish banks are facing a new era of competition and not just in the variable mortgage interest rate market. It was the likelihood of the banks facing greater pressure from rivals on other banking profits in the future that was responsible for most of this week's setback for the share price.

Indeed, as one commentator pointed out, the new rates merely return banks to the profit margins they enjoyed pre-EMU. As we lowered rates to join the euro zone, the lenders padded their profits by failing to pass on to either borrowers or savers the full benefits of lower rates.