Regulator finds bank departures have been costly for borrowers

In its annual Economic Research Bulletin for 2023, the regulator also said that firms that are typically less likely to access bank financing were gravitating more towards non-bank sources of finance which could create medium-to-longer term risks for these customers. Pic: Larry Cummins

Low competition in the retail banking market following the exit of two prominent players has been costly for borrowers while so-called non-bank entities filled the gap left behind, research suggests.

In its annual bulletin, the Central Bank indicated that the departure of KBC and Ulster Bank left banking customers unable to “perfectly substitute to other sources of borrowing” and were therefore on the hook for establishing relationships with new lenders.

At the same time, non-bank entities, sometimes referred to as vulture funds, that do not take deposits and are therefore subject to a different regulatory regime to retail banks, gained business amid low levels of competition.

Meanwhile, the remaining three main lenders swelled their loan books and subsequently posted bumper annual profits as customers transferred to them from the exiting banks.

In its annual Economic Research Bulletin for 2023, the regulator also said that firms that are typically less likely to access bank financing were gravitating more towards non-bank sources of finance which could create medium-to-longer term risks for these customers.

The financial watchdog also noted that customers with the remaining Big Three banks operating in the Irish retail banking market are not availing of savings options due to poor communication from their lender.

Previous research has also documented a widespread "failure to refinance" among banking customers, where substantial savings available to mortgage holders through were not claimed.

Following regulatory intervention to enhance a lender’s communication with customers, the Central Bank found the average savings achieved by re-financing borrowers in its data was €1,209.

This was achieved through a series of measures including follow-ups with customers about their options, the research showed.

The impact of low levels of refinancing inhibits the delivery of policy to the real economy, according to the regulator. Underfinancing can also leave borrowers with unnecessarily elevated debt-service burdens.

Separately, customers may have become disenchanted by a lack of banking options while interest rates continued to climb last year. The first interest rate cut was announced by the European Central Bank in June of this year and may influence customer behaviour for the next Economic Research Bulletin.

Meanwhile, the Central Bank also found that housing assistance schemes, specifically the Help to Buy (HTB) scheme, which provides cash grants to support downpayments of new mortgage borrowers in a subset of the Irish mortgage market, had a “modest” effect on purchase prices last year.