I welcome this opportunity to have a debate on banking matters.
Recent events – Ulster Bank, BOI branch closures and AIB’s acquisition
This debate is very timely because in the in the past fortnight we have had three major announcements from our banks that will have major consequences for our citizens and speak to the challenges that the banking industry is facing right now, as is the country in general in the midst of this pandemic.
I am speaking of course about NatWest’s announcement of the phased closure of Ulster Bank and the announcement by Bank of Ireland to close many of its branches later this year.
In addition, Allied Irish Banks announced a significant transaction which is important to the Irish stockbroking community and its business model.
Both the NatWest and Bank of Ireland decisions are regrettable for their customers, staff and indeed the wider economy.
Ulster Bank has a long history in Irish banking and it is a very sad day that such a point has been reached.
Nevertheless these commercial decisions are being made by the boards and management of private companies and are a reflection of the wider challenges the banking sector is facing, not only in Ireland but also internationally.
COVID-19 has obviously posed significant challenges for our society and economy, and many households and small businesses have been especially affected.
The Government fully recognises the financial and other difficulties the pandemic has caused for many of our citizens, and it has put in place a range of important and necessary supports for households and businesses.
The banks have taken action and there is a continuing need for them to be sensitive in dealing with customers and to show flexibility.
My colleague, Minister of State Fleming, will address the challenges of COVID-19 in more detail in a moment.
Challenging Environment
The banking sector is operating in a challenging business and economic environment.
Low, indeed negative interest rates have depressed their revenues. They are under pressure to make large investments in technological change and face new competition from non-banks.
Meanwhile they are trying to reduce costs to improve returns as capital requirements are a multiple of where they were 10-15 years ago in order to make the banking system safer and more robust.
This is the reality of the situation and it is as important to acknowledge this, as it is to acknowledge that we rely on banks for credit and capital or to acknowledge their roles as employers or to acknowledge the standards that we expect.
Fundamentally banking is about taking risk, including on deciding who should receive credit and who should not, and this is not the business of the State in a modern economy.
However, we should also acknowledge that our experience, and that of many other countries, has resulted in the entire regulatory and governance landscape being changed in recent years to ensure that the banks would never be allowed to wreak havoc again on our society.
Private sector losses should never again be socialised.
We have made the banking system far safer in Ireland and that is vital, however there are consequences for all stakeholders – borrowers, depositors, bank staff and even the banks’ shareholders.
The various parts of the banking business model are all interlinked so we have to bear in mind that one measure will have commensurate knock-on implications and therefore cannot be viewed in isolation.
I want to address some general issues regarding banks that have been raised with me recently before dealing with the specific matters of recent days.
Interest rates on deposits and loans
The question of interest rates, deposit balances and liquidity in general has risen significantly across the banking system in Europe in recent years as the ECB has continued to provide additional funds through their asset purchase schemes and long term refinancing operations.
This has been further exacerbated by the COVID-19 pandemic as households continue to stay at home and save and businesses defer investment decisions.
This excess liquidity has grown significantly in the European system and a large part of it gets placed back on deposit with the ECB who charge the banks -0.50%.
The application of negative deposit rates by the ECB has resulted in European banks incurring a consequent cost on deposit accounts.
The Irish banks are impacted in a similar way to their European counterparts.
The banks across Europe have looked to pass some of the costs associated with negative rates to deposit holders with larger balances.
The Irish banks are no different in this regard.
In passing on some of these costs it is important to note that banks cannot differentiate between customers in different sectors and for that reason the approach taken is to apply charges based on the size of the deposit balance.
The application of interest rate charges is solely a commercial matter for the board and management of each bank.
Capital Levels
The question of capital levels and how they impact bank pricing decisions have also been in the news recently.
There has also been wide coverage of the rates charged by Irish banks on both mortgage and SME loans highlighting that they are amongst the highest in Europe.
However, in terms of capital levels, this higher level of capital has meant that banks are now safer and not overleveraged and, unlike the time of the financial crash, the impact of COVID-19 has not posed questions for the stability of the banking system.
It is important that banks have a high and more robust level of capital.
That is the foundation of a safe financial system and allows banks to withstand the ups and downs of the business and credit cycle.
However, this will nevertheless have certain impacts on other aspects of banking.
Credit risk and capital requirements in Ireland are still elevated due to historical loss experience on loans and these higher levels also results in higher credit and capital costs for the Irish banks and in turn the interest they have to charge on loans.
At a wider EU level, the regulatory and supervisory framework for banks has changed significantly since the financial crisis.
The reform of the banking regulatory framework was carried out primarily through the Capital Requirements Regulations and Directives, the Bank Resolution and Recovery Directives, the introduction of the Single Supervisory Mechanism and the Deposit Guarantee Scheme Directive.
Banks are now subject to more intensive supervisory regimes, must hold more and better quality capital, and have enhanced reporting requirements.
These reforms are aimed at strengthening the resilience of the banking sector in order to build capacity to absorb economic shocks, while ensuring that banks continue to finance economic activity and growth.
The reforms also sought to weaken the link between sovereign and banks to reduce the need for future State bail-outs of our banks.
Government approach to banking challenges
The Government wants to ensure that the banking and financial system is one that will effectively contribute to and support economic growth and employment.
However, it will also have to be profitable in order to do this.
Profits are also important for banks as a source of capital to support loan growth and to allow for investment in the business – for example, expensive IT programmes.
Profits are also important as a source of capital to support losses which inevitability arise in periods of economic stress.
Ulster Bank
Turning to Ulster Bank, its withdrawal from the market will be a phased one and will take place over a number of years.
Therefore, there is no immediate change for customers with full banking services to continue across all channels for existing and new customers.
It is important that this is pointed out clearly to the bank’s customers and the general public.
As Deputies are aware, NatWest is in early stage discussions with PTSB and other strategic banking counterparties about their potential interest in certain retail and SME assets, liabilities and operations.
Also a Memorandum of Understanding, which has been signed with AIB regarding certain corporate and commercial loans, signals a potentially important development for the Irish banking sector.
While these are primarily commercial negotiations, the Government is supportive of trying to bring about an outcome that is good for both AIB and PTSB, but more importantly for Ulster Bank’s customers, staff and the Irish economy generally.
Bank of Ireland branch closures
In relation to the announcement by Bank of Ireland on Monday to close 103 branches in Ireland – 15 of which are in the North – it is important to acknowledge at the outset that as Minister for Finance I cannot mandate or overrule the internal decision making processes in any bank, even one in which the State has a shareholding.
Decisions in this regard are a commercial matter and the sole responsibility of the board and management of the banks, which must be run on an independent and commercial basis.
Bank of Ireland’s decision is further evidence of the impact technology is having on the way customers interact with their bank.
Developing mobile communications allows more and more people transact their banking business remotely, and banking is only one of the many businesses that is now conducting a greater proportion of its business on-line.
However, it is accepted that many people will still need, or want, to carry out their banking activities in person and it is a welcome development that Bank of Ireland is now entering into a new partnership with An Post that will allow personal and business customers to use their local post office for a range of banking services, including cash withdrawal and lodgements.
More generally, the bank branch as we know it is undergoing re-invention, re-orientating towards providing financial advice, with customers visiting their branch less frequently.
Acquisition of Goodbody by AIB
Yesterday’s announcement by AIB that it has reached an agreement to acquire Goodbody Stockbrokers is a positive development for three important Irish companies, namely Goodbody, Fexco and AIB.
It is positive for Goodbody because they will continue to have a well-capitalised owner providing opportunities for growth, which will support the wider needs of the Irish economy and businesses.
The acquisition also represents an excellent strategic opportunity for AIB to deliver on its ambition to diversify its revenue in a low interest rate environment and broaden its financial offerings in the life, pension, wealth and asset management sectors, in addition to enabling its Irish corporate and business customers to access a greater range of services.
For Fexco, which is an important employer in the south-west, the proceeds it receives from the transaction will help it continue to grow and innovate in the financial services sector.
The standard remuneration arrangements in a stockbroking business are very different to those that pertain in a retail and commercial bank, such as AIB, and reflecting this the bank had sought my consent for the continuation of the current remuneration arrangements in Goodbody.
This has been done in a manner which ring-fences Goodbody from the rest of the AIB Group and ensures ongoing compliance with Government policy on bank remuneration which remains unchanged.
As I stated yesterday, a small number of AIB staff, including from its Corporate Finance and Wealth Management business will transfer to Goodbody in order to maximise synergies between the teams and avoid duplication of activities.
There will also be a restriction on Goodbody hiring any person in the open market or otherwise, with a total remuneration package above €50,000, who was an employee of AIB (or any Group Company) at any time within the previous two years.
I also welcome the announcement by AIB that it intends to establish a SME Equity Fund, which will be of assistance to companies wishing to access equity finance.
J&E Davy
I note yesterday’s announcement by the Central Bank of Ireland that it has fined and reprimanded J&E Davy for regulatory breaches arising from personal account dealing.
As I stated yesterday and again this morning, the behaviour which has been detailed by the Central Bank in relation to Davy falls gravely short of the standards of behaviour that are expected of leaders in a position of financial responsibility.
While this is, in the first instance, a very serious regulatory matter between Davy and its regulator, I have called on Davy to respond to the Central Bank’s statement on the outcome of the enforcement action.
I note that they have done so this evening and that they have said that they “deeply regret the shortcomings that emerged from the Central Bank of Ireland’s investigation” and that they apologised “unreservedly and unequivocally that these failures occurred and that Davy failed to adhere to the high standards expected of the firm both internally and externally”.
Addressing challenges
Of course, there are still further significant banking problems which need to be addressed.
While it is welcome that many borrowers have been able to return to full loan repayment after a COVID-19 payment break, many borrowers are still impacted by the pandemic and they will continue to need, and will be expected to obtain, support and assistance from their lenders.
It is also important that lenders support and assist new borrowers and that they continue to lend into the economy. Itis welcome that recent months have seen a significant rebound in mortgage approvals and lending.
It is also essential that sustainable businesses and firms will be in place to meet the needs of consumers and the economy when the pandemic has passed, and that these firms have, and will have, access to appropriate credit facilities.
To that end, the Strategic Banking Corporation of Ireland has worked closely with the Department of Enterprise, Trade and Employment, the Department of Agriculture, Food and the Marine and my own Department in the design of and implementation of a number of credit related support schemes such as
- the COVID-19 Working Capital Scheme;
- the Future Growth Loan Scheme; and
- the COVID-19 Credit Guarantee Scheme.
The overriding objective of these schemes is that credit is, and will be, available at competitive prices for those firms that require it.
In relation to bank accountability, the Government intends to introduce a ‘Senior Executive Accountability Regime’ to drive positive changes in terms of culture, greater delegation of responsibilities and enhanced accountability, while simplifying the taking of sanctions against individuals who fail in their financial sector roles.
It is my intention that the heads of Bill to provide for this will be drafted and presented to Government for its approval in the near future.
However, we should also note that, unlike the financial crash, the impact of COVID-19 on the banks has not called into question the stability of the overall system.
The banking reforms which were introduced since the last crisis have indeed helped maintain financial stability. Irish banks now operate more soundly and, guided by the Central Bank mortgage lending rules, provide credit on a more prudent basis.
They are now of a size that is more in line with the size of our economy, they have higher capital levels and a more solid financing base.
While there are obvious banking challenges, banks are now in a position to meet those challenges and, even more importantly, they are in a position where they can work with their customers to help them meet the real challenges currently before many businesses and households.
Thank you.
Ends