House buyers face inflated mortgage cost after KBC exit

Second bank's exit leads to increased fears about a lack of competition in the Irish banking market
House buyers face inflated mortgage cost after KBC exit

KBC Bank Ireland looks set to leave the Irish market after announcing talks with Bank of Ireland. File picture

House buyers could face paying inflated mortgage costs following the shock decision by KBC Bank to quit the market — a move that has fuelled calls for major State intervention.

KBC is the second lender after Ulster Bank in recent months to exit Irish banking, despite pledging as recently as February that it would stay.

There are now increased fears about a lack of competition in the sector, with the big two lenders, AIB and Bank of Ireland, set to become even more dominant.

Significant fallout

Experts warn that KBC’s departure and its plan to sell most of its €10.5bn of home loans to Bank of Ireland will have significant fallout because it was one of the few banks here that aggressively competed on price for the business of first-time buyers.

It comes just weeks after the decision of Ulster Bank to shut up shop in the Republic, and for its €20.5bn in mortgage and business loans to be carved up between AIB and Permanent TSB.

Bank of Ireland, which plans also to take on the deposits of KBC, sparked a political storm last month when it said it had decided to close over 100 bank branches in the Republic and in the North.

'Not good for consumers'

Leading mortgage broker Michael Dowling said that KBC, which offers among the cheapest mortgages, will now be acquired by Bank of Ireland, which has some of the least competitive mortgage rates for first-time borrowers.

AIB and Bank of Ireland will end up controlling over two-thirds of all mortgages, with Permanent TSB a distant third, even if it were to secure the home loans it wants in the carve-up of Ulster Bank. 

“It is not good for consumers,” Mr Dowling said.

Dermott Jewell, policy adviser at the Consumers’ Association of Ireland, said there is no longer anything close to competition in Irish banking and the shock exit by KBC leaves it “wide open to the main two banks to literally construct this market as they see fit”.

Government intervention

The Government will now have to intervene again just over 10 years after the lenders were expensively bailed out by taxpayers to offset “a meltdown” of the Irish banking market," warned senior economist Jim Power.

Mr Power said there is an ongoing market failure in Irish banking, and the solutions used in the past that relied on new entrants from abroad will no longer work. 

There is a requirement for Government intervention in the shape of a State-owned lender, he said.

Fergal O'Brien, director of public policy at business group Ibec, said the State will be required to increase its role in Irish banking, building on its initiatives with the Strategic Banking Corporation of Ireland (SBCI) and the Ireland Strategic Investment Fund.

A step towards 'duopoly'

The exit of KBC "moves us a step closer from an effective duopoly to an actual duopoly", said Neil McDonnell, chief executive of business group Isme. 

Mr McDonnell said the State could extend its Strategic Banking Corporation of Ireland to give loans directly from a small number of regional offices in Dublin and Cork and elsewhere and banks could be strengthened by legal reforms.

The finance minister, Paschal Donohoe, said the departure was “a significant event”, and he hoped that an agreement between KBC and Bank of Ireland would be struck soon, and that that protections for KBC customers remain in place through the process.

Debate over costs in Ireland

The departure of Ulster and KBC has sparked again a debate about the reasons that Ireland has among the costliest mortgage loans in the eurozone.

Banking chiefs here have argued that they are required to carry too much in reserves but many brokers say that they have long failed to compete aggressively because of their market dominance.

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