RISING costs are becoming a crucial issue for banks operating in the International Financial Services Centre, according to the managing director of Bankgesellshaft Berlin (Irl), Mr David Allen.

Reporting a 16 per cent rise in pretax profits to £6.3 million for 1996, Mr Allen said rising costs were now a very important issue for the future success of the banks operating in the IFSC. They were a more important issue than the tax concessions available at the centre, he said.

"It is difficult to get accommodation at the right price in the IFSC and competition for people with international experience is driving up staff costs," he said. He said all of the banks operating at the centre were concerned about cost developments.

"We are competitive now, but we need to watch the situation for the future," he said.

The bank, which is a subsidiary of Bankgesellshaft Berlin, increased total assets by 124 per cent to £1.2 billion in 1996 while employment increased from 12 to 20 people. It was set up in the IFSC just over two years ago.

Net interest margins have tightened, he said, declining to disclose the numbers for competitive reasons. On the lending side, margins halved over the past two years, according to Mr Allen, because big companies did not need as much funds and the banks were awash with cash to lend.

Bankgesellshaft Berlin (Ireland) is involved in syndicated lending, structured finance and debt securities. On the liabilities side margins have improved because banks can raise funds at lower costs. But because this increase in margins has not compensated for the fall on the asset side, overall margins have fallen.

Bankgesellshaft has a second operation in the IFSC, BGB Finance (Ireland) which is the financing and bond issuing vehicle for the group. It has issued $10 million (£6.5 million) in medium term loan notes.

The bank's parent Bankgesellshaft Berlin recently confirmed that it was in merger discussions with Nord L/B. It would create the second largest banking group in Germany and could be expected to double the size of BGB, Mr Allen said.

A merger would be beneficial in an increasingly competitive and consolidating European banking market, Mr Allen said. "Being a big player in the new European market will be important particularly after the single currency," he said.