Banking in Ireland is far from being highly competitive, writes Terry Calvani.
In light of a recent report from the Competition Authority, the assertion in this newspaper by the Irish Bankers' Federation that banking in Ireland is highly competitive is at best selective.
It comes as no surprise that bankers would highlight mortgages as a positive story to relate. Since the arrival of Bank of Scotland, consumers here have enjoyed the benefits of greater competition and the incumbent banks have been forced to get by on lower interest rate margins.
In fact, the fall in interest rates in the mortgage market can be contrasted with the static effect in working capital lending to small business shown in the analysis conducted by the authority. In essence, the mortgage market is the exception which proves the rule that banking in Ireland is far from being "highly competitive".
The Competition Authority's Report on Banking in Ireland shows that banks do not compete aggressively for customers in certain key areas. As an example of how customer "lock-in" and failure to attract new banks into the Irish market can affect the bottom line, small businesses in Ireland lost out on interest rate reductions worth approximately €255 million between January 2001 and January 2004. This situation will continue unless there is more competition.
The IBF presents a well-marshalled set of studies as part of its recommendation to "look at the bigger picture before drawing conclusions". This is precisely what the authority did in an earlier report published in August 2003 which involved a background analysis of the banking sector and competition issues that arise in banking internationally.
This report, carried out by London-based economic consultants LECG, examined a range of key banking issues before the authority decided on the areas to focus on for detailed scrutiny.
It is also noteworthy that none of the figures presented by the IBF disputes or contradicts the authority's findings; indeed, they refer to areas outside of the banking study's remit
Concentrating on those areas where competition is contended to be alive and well (residential mortgages, corporate banking) is no substitute for the introduction of real competition in the sectors identified by the authority.
While the authority has found no evidence of illegal collusion or a cartel amongst the banks, the hard fact remains that competition in banking is significantly below the level which could be expected if the appropriate changes were made to the structure and operation of the banking system. The challenge of addressing and implementing the recommendations outlined in the authority's report falls to a range of bodies directly responsible for the banking sector.
However, we should be in no doubt that without these alterations, personal and business customers as well the international competitiveness of the Irish economy stand to suffer the consequences for the foreseeable future.
The authority's decision to concentrate on a number of key areas - personal current accounts, lending to small and medium-sized enterprises, and the clearing system - should in no way be construed as implying that all is well everywhere else in the banking system.
The authority chose these particular areas for a number of reasons. First, the authority targeted its resources to deliver a comprehensive report as quickly as possible. Nobody wanted this study to drag on be the equivalent of another tribunal of inquiry.
Second, these three areas are highly important. The current account is fundamental to our relationship with our bank, while the importance of the SME sector in our economy, and for our international competitiveness is well-recognised.
Finally, many of the lessons we learn from examining competition in these sectors are likely to apply across the spectrum of banking services.
Last week, the Irish Bankers' Federation implemented a customer switching code for personal current accounts. The authority welcomes the switching code but it does raise the question about why banking customers in Britain have been able to avail of this service since 1991. The authority will examine with great interest the level of switching which occurs following promulgation of this code. The authority has also recommended that a switching code be put in place for business banking, as in Britain.
The focus for the Competition Authority now switches to how to satisfactorily remedy the many problems identified. The intentions of the recommendations are to:
- make it easier for customers to move banks;
- make it easier for more banks to offer new and innovative services to business and personal customers, and
- make it cheaper for small business to access working capital.
The authority is under no illusion as to the extent of the challenge and we understand that a single report on its own will not change the world of Irish banking. Although the authority has no enforcement powers in this area, we are confident that the report can serve as a catalyst for significant change.
To this end, the authority is currently accepting submissions from interested parties, which will inform the Final Report on the Banking Sector, due to be completed later this year.
Terry Calvani is a member of the Competition Authority and director of the authority's study into the banking industry