Focus on lack of bank competition

Focus on lack of bank competition
ECB president Mario Draghi

It “remains to be seen” whether the higher profits generated by the small number of lenders in the Republic since the crisis will lead to new entrants and push down margins of the existing banks, according to new Central Bank research.

The study by Ciarán Nevin, Irish retail bank profitability 2003-18, examines the huge upswing in profits posted by the main lenders since the crash.

The high profits and low competition and costly loans that banks charge households and businesses have come under the spotlight in recent weeks after ECB president Mario Draghi said a “quasi-monopoly” operates in the country.

The study shows the return to profits was driven by accounting writebacks into profits of provisions set aside to cover loans which were underwater before property prices started to soar.

More recently, the lenders’ profitability growth, measured by key net interest margin measures, has slowed amid the low-interest era ushered in by the ECB in the past six years.

Lenders’ margins could therefore be boosted as the cheap money era ends and the ECB, in time, moves to increase interest rates for the first time since the crisis.

“If this theory holds, a return to higher interest rates may boost the profitability of Irish banks further, by increasing the return on loan assets,” according to the analysis.

But by comparing the profitability of other banks across the eurozone, it identifies that the lack of competition in Ireland may be playing a significant role.

One possible factor is competition. The retail banking sector in Ireland became much more concentrated during the crisis and remains so. More market power allows for wider margins — greater profits.

“These conditions may attract market entrants in the future and increased competition may place downward pressure on margins but this remains to be seen,” says the study.

New entrants promise to benefit “Irish consumers through reduced costs and increased choice”.

The report also signals that attracting new entrants “may depend on deeper European financial integration to create a level playing field for potential new entrants”.

The findings echo remarks made in recent weeks by Central Bank governor Philip Lane and Mr Draghi.

The ECB president told the Oireachtas finance committee he was aware that retail interest rates charged in Ireland were at elevated levels but said plans by the EU to push on for a banking union would lead to increased competition in time.

More on this topic

Danske offers 2,000 staff option to leave bankDanske offers 2,000 staff option to leave bank

Abu Dhabi fund cuts stake in Italy's UniCredit bankAbu Dhabi fund cuts stake in Italy's UniCredit bank

Ferdinando Giugliano: How bailing out bankers has become all the rage againFerdinando Giugliano: How bailing out bankers has become all the rage again

Yanis Varoufakis: The problem isn’t Christine Lagarde. The problem is the ECBYanis Varoufakis: The problem isn’t Christine Lagarde. The problem is the ECB

More in this Section

UK interest rate cut less likely after strong employment figures, say expertsUK interest rate cut less likely after strong employment figures, say experts

Starbucks boss urges coffee drinkers to avoid milk to meet carbon goalsStarbucks boss urges coffee drinkers to avoid milk to meet carbon goals

Knowing more about where our taxes go would help balance the arguments around future hikesKnowing more about where our taxes go would help balance the arguments around future hikes

EasyJet shares rise 4.5% on winter season sales boostEasyJet shares rise 4.5% on winter season sales boost


Lifestyle

Hannah Stephenson has advice on how to care for your garden when wet weather strikesHow to prevent and deal with waterlogging in the garden

If you're down in the epidermal dumps, exfoliation, hydration and decongesting is what you need.The Skin Nerd: How to prep and pep that played-out January skin

The Winter Show, which gets underway in New York this Friday, is a celebration of world cultures, from antiquity to the present.Time travellers are packing their suitcases for New York this week

“Finish him!” It’s one of the most famous lines in video games – in fact, they pretty much built the entire series around it. Mortal Kombat is notorious for brutal finishing moves, in which the characters kill off their opponents in horrific (and often humourous) fashion.Game Tech: Mortal line lives on in the cinema

More From The Irish Examiner