FROM THE ARCHIVES:FOR DECADES, the main problems with Irish banking were seen to include the absence of competition and tight regulation, makings loans difficult to get and expensive for borrowers. Even the banks wanted to break up their own cartel, as this report by Bill Murdoch shows. – JOE JOYCE
THE CLEARING bank cartel should be broken up and the tight control of interest rates by the Central Bank should be ended: the controls should be replaced by a looser and more flexible system which would link the rates more to market rates. These are the main conclusions of a study on banking in Ireland.
The report by economic consultants Davy Kelleher McCarthy was commissioned by the Irish Banks Standing Committee. The recommendations echo the views of a number of bankers who have openly called for the ending of the cartel. Indeed, the clearing banks have been actively discussing the possibility of dismantling the cartel.
The report notes that the Irish banking system is now a heavily regulated one and the system of regulation as well as the tax code has given rise to numerous distortions in the financial markets.
However, it contends that the cartel operates in a manner which, given the regulatory environment, may not always be in the interests even of its own members.
The special privileges enjoyed by some financial institutions should be abolished as recommended by the Commission on Taxation, and there should be competitive equality between all deposit taking institutions. The report notes that building societies pay tax at 35% rather than 50% and also do not have to carry or pass on to their customers the cost of liquidity ratios.
The report calls for a new Central Bank Act to be introduced. This would give it powers to control the operations of building societies. However, the private sector guidelines should be abolished. The consultants recommend that these should be replaced by a broader monetary policy target.
This target would be achieved through market interventions directly on the liquidity of the system and on interest rates.
On the regulation of bank profits, DKM say that competition rather than Central Bank intervention (through interest rates etc) should be relied on to regulate bank profits. As they see it, the depositors’ interest would be protected through an intensification of the Central Bank’s supervisory policy rather than through the introduction of compulsory deposit insurance. The report feels that the banks are of such a large size that the depositors are given an effective guarantee of security.
At the moment, the Central Bank controls the associated banks through the primary and secondary liquidity ratios.
But the consultants say that the primary ratio should be retained but the secondary ratio “which has no fiduciary or monetary policy function, should be abolished”.
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