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Competition in Irish banking

Overview

Earlier (pre 2007) versions of “How Banking Works…” lamented the unsatisfactory level of competition in a highly profitable banking market in Ireland. Indeed, the low level of competitiveness was a contributor to the high level of competition. The position has now changed in that the banking market is no longer profitable – and the result is an even lower level of competitiveness – with little prospect of improvement in the short-term or medium-term.

A clutch of reports on competitiveness in the period 2004-2007 are rendered largely irrelevant by the changed circumstances.  The issue for the government and for the banks is survival of the banking system, and of the economy generally.  So this page will confine itself to the personal views of this author.

1.     In a profitable market, one could have expected, or at least hoped that new entrants would emerge in the marketplace, and that these would drive a higher level of competition.  Although some new entrants did emerge prior to 2007, these were not sufficient. The level of risk in the market-place is now such that new entrants are unlikely.

2.     The indigenous banks are very weakened by the events of 2008/9, and therefore unlikely to focus on competition.

3.     The government’s rescue plan for the banking system, based on the National Assets Management Agency (NAMA) is developed within a political context which is hostile to banking profitability, and which will limit commercial strategies of banks for many years

“How banking works…” (HBWI) will continually monitor the market, and will re-write this section when conditions change.

In the meantime, we reproduce a section below from a previous version of HBWI, and wonder how relevant it is today

Reproduced from a previous version of HBWI.  How relevant is it today?

One of the real difficulties in our view is that the banks may have discovered that competitiveness does not pay.  The Irish market is notoriously conservative in relation to banking - it does not respond to the stimulus of competitive offers in the way that economists might predict.  Only a small segment of the market  reacts - and some of the characteristics of the transient group is that they are financially aware, manage their funds well, and are, in general, low-profit customers for the banks

 For many years, the complaint was about the difficulty of changing banks - but when the new procedures for changing were introduced, the numbers switching were small in the context of the market size. 

 There are significant differences in the rates for credit cards, and little else to differentiate them.  And transferring is easy and financially attractive.  Yet the levels of retention are very high - transferring is a minority sport

 And banks find difficulty with product improvement/replacement.  Never in the history of Irish banking has a product been withdrawn to replace it by a more modern product.  So the market forces banks to continue with a stock of out-dated products and services

There are only two effective ways to achieve change.  The first is when/if the mass of the public demands it effectively.  The second is if/when economic downturn occurs.  There is nothing like a banking crisis to change things.  The best examples are found in the Scandinavian countries, where a banking crisis in the late 1980s led to major reform.  The legacy is that the Scandinavian countries have the most effective banking systems and services - even though the structure of the market is similar to Ireland.