Donohoe says low interest rates and new tech adversely impacting on banking sector

Low interest rates, new technologies and the impact of Covid-19 are having an adverse impact on the banking sector here, Minister for Finance Paschal Donohoe has warned.

In an address to the Seanad on the future of banking in Ireland, Mr Donohoe referenced recent announcements by Ulster Bank and KBC Bank indicating that they planned to exit the Irish market, and Bank of Ireland's decision to close more than 100 branches.

“These announcements illustrate that the operating environment for banks in Ireland is very difficult,” he said.

Mr Donohoe said the current low interest rate environment had depressed banking revenues. Combined with their high cost base “this puts pressure on banks’ profits, and in turn the attractiveness of the market”.

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AIB is already charging high-net worth customers interest on their savings, a reflection of the ultra-low rate environment, while Bank of Ireland indicated it also plans to start charging negative interest rates on savings above a certain limit.

Mr Donohoe said the announcement by Bank of Ireland in March that it plans to close 103 branches in the Republic and Northern Ireland was evidence of the impact technology was "having on banking and the way the public interacts with banks".

“Increasingly banks are competing with new technology-driven firms regarding services that were previously the preserve of traditional banks.”

Mr Donohoe also highlighted the impact of the pandemic here and elsewhere.

"The impact of Covid-19, coming on top of weak enough economic growth in Europe and America, has already been seen in European banking with consolidation and mergers in other European markets."

Mr Donohoe said there was a view in Europe that the banking sector had too many participants “and that there is a need for it to consolidate so that it can more efficiently provide services”.

Exit

The imminent exit of Ulster Bank and KBC from the Irish market is likely to significantly reduce competition further.

Banks here have already been criticised for charging customers higher interest rates on basic financial products, such as mortgages, than their European counterparts.

“It is easy to say there is a problem with the banking market, but it is more difficulty to say where the appropriate balance between competition and consolidation lies in the best long-term interests of the economy,” Mr Donohoe said.

“While the Government would like to see a more robust level of competition in the Irish banking market, it must be borne in mind that in the early years of this century the Irish banking market was a very competitive one but not sustainably so, and I think it is also fair to say that ultimately it did not serve the best long-term needs of the economy or society.”