ESRI wants swifter State banking sector exit

A quicker-than-planned dilution of State involvement in the banks is needed in order to boost competition in the banking sector and help usher in lower lending rates to consumers, a leading economic think-tank has said.

The Economic and Social Research Institute (ESRI) has said continued State involvement in the banking sector – via stakeholdings in the banks and strengthened regulatory powers for the Central Bank – is acting as a disincentive to outside credit institutions and that more players will be needed as the mortgage market grows in the coming years.

“Recent legislation proposing to give the Central Bank powers to regulate variable interest rates may act as a further disincentive to new competition entering the Irish market.

"It merely confirms the extent to which the different institutions of the State are intervening and, potentially, distorting the domestic banking market,” it said.

In particular, it would like to see a quicker-than-planned start to the AIB sale process.

The recent Programme for Government said no more than 25% of the State’s near total ownership of AIB will be sold before 2019.

Last month, Fine Gael MEP Brian Hayes said those terms should be altered with the Government committing to selling 50% by 2019.

“It’s not in Ireland’s long-term interest to have large State holdings in the banking sector. It doesn’t help competition in the sector. It discourages new entrants from coming into the banking market, offering new products and competing with the pillar banks for business,” he said.

The ESRI’s latest quarterly economic bulletin, published this morning, sees it forecasting continued economic growth for Ireland – including in the key areas of jobs and trade.

However, it has marginally lowered its outlook and hasn’t fully factored in a potential Brexit to its numbers.

The Irish economy should grow by 4.8% in GNP terms (which strips out exaggerated foreign multinational contribution) this year and by 4.3% next, it claims.

Only three months ago the ESRI suggested 5% growth for this year. These forecasts do not factor in the potential after effects if the UK votes, later this week, to leave the EU.

Nevertheless, the ESRI still sees Irish exports rising by nearly 9% this year and by a further 7.9% in 2017.

Consumer spending, it said, will grow by 4% this year and by 3.5% next year and the unemployment rate should dip below the 7% point by the end of 2017.

The Institute also predicts t the country is still three years off meeting the 25,000 per year new house build levels deemed necessary to meet demand and it said the Government may have to start running budget surpluses – basically, save on expenditure plans – if signs emerge of the economy overheating again.

Budgetary watchdog, the Irish Fiscal Advisory Council recently described as “a good concept” the idea of a ‘rainy day fund’ some politicians have called for as a way of cushioning the economy from future shocks.

In GDP terms, the ESRI sees the economy growing by 4.6% this year and by 4.2% in 2017.

In its latest assessment it says that the Irish economy is expected to perform well in both 2016 and 2017 and growth will increasingly be more domestically driven.

It counts as downside risks international trade issues such as the Chinese economy and a potential Brexit and housing supply increases as the main upside risk.


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