Big changes ahead for the banking sector

THIS week’s shock decision by the EU demanding the break-up of Dutch banking giant ING has caught commentators and analysts by surprise.

The demand that ING get back to its core lending charter and sell on its international insurance businesses is a condition the EU saw fit to impose on the bank as a recipient of state aid. Belgium’s KBC and Franco-Belgian Dexia are awaiting European Commission rulings before they know their fate.

Closer to home, Royal Bank of Scotland and Lloyds, effectively state-controlled, expect to suffer the wrath of the EU also and to be ordered to dispose of assets once the EU has had time to assess their cases.

This stance by the EU has AIB chairman Dan O’Connor seriously worked up about the prospects for his bank. He described as draconian the action taken by the EU on ING when he spoke at the Irish Banking Federation’s annual conference on Thursday.

In effect, the Commission has ordered the break-up of the Dutch giant to return it to its core purpose of commercial and consumer lending, which is what most banks were designed to do in the first instance.

O’Connor’s mood would not have been lightened any by the strong assault by Fine Gael’s Richard Bruton on the banks at the same event.

Bruton threatened massive penalties in the future on rogue banks and generally condemned their buccaneering style that pitched us all into the current crisis.

His moral indignation did not stop there however and he also threatened that a future Fine Gael government could break up the major Irish banks into smaller units to ensure they could be wound up in the event of another credit scandal.

If the EU Commission continues its purge of the sector then Bruton, who has been a massive critic of the banks, could be denied that pleasure.

The Commission has yet to receive AIB’s strategic plan, which it is obliged to submit as part of the bailout package from the state, and who knows where the axe will fall once it has completed its deliberations.

Some of this is a touch circuitous and it has already been signalled that the bank may have to sell off those assets to adequately recapitalise the organisation.

There is the issue also concerning the amounts the Irish banks have lent against their deposit bases.

AIB and Bank of Ireland have lent 130% to 140% of their deposit bases and could be required to get that figure back closer to 110%, which in the days of conservative banking practices was deemed to be the prudent ratio.

The AIB boss said on Thursday that the banks had brought this on their own heads, but as the one charged with charting its future course, his fears at having to face the Commission in the months ahead are understandable.

Though scorned in some quarters for its conservatism the ECB is perhaps feeling vindicated in taking the more restrained line on rates given the disaster that has hit the global banking sector in the meantime.

The Irish banks cannot escape that fallout either, but it is fair to say that by international standards they are small fry relative to their British and European counterparts.

It’s hard to imagine that the EU will insist on them being split up into their former component parts.

The two banks as we know them are the result of a series of mergers in the 1960s that saw the emergence of Bank of Ireland and AIB.

It’s hard to imagine the EU would insist they revert back to that, but the ING decision suggests the Irish banks are set for significant change.