It is vital that the fundamentals of banking business are heard fairly and are the subject of an honest debate by all who participate in this review.

The review of the banking sector in Ireland is well under way with the recent publication of the terms of reference by the Minister of Finance, Paschal Donohoe. It will enable stakeholders to express what they believe is necessary for a stable, progressive, viable and sustainable banking sector in Ireland.

We all agree that a strong, well-capitalized banking system is at the heart of our economy. Past experience has taught us the hard lessons of the impact of an excessive risk-taking banking system on an economy and a society, and the past 10 years have seen policymakers, regulators and banks adopt a panoply banking regulations and laws. It was the most prolific regulatory period in banking history, encompassing all aspects of banking, from capital quality and adequacy, corporate governance and conduct, to culture and individual responsibility. .

Strong governance and higher capital requirements are now strong pillars of the EU-wide banking system, and the government is right to cite financial stability, in its review, as the priority issue to turn to. to the future.

But it is also essential that the business fundamentals of retail banking in Ireland are understood in a balanced way by all stakeholders and that the place of profitability and return on equity in creating a strong and attractive industry that can develop, innovate and reinvest in its future has its place in the discourse.

Low profitability

Let us not forget that it was the sudden departure of two retail banks at the start of the year, and subsequent questions regarding the hard core of retail banking finances in Ireland that led us to this review. We welcome the fact that “the retail banking business model” is included as a central issue in the terms of reference. Without viability, there is simply no bank.

The profitability of the Irish retail banking sector, measured in terms of return on equity, is among the lowest in Europe – 2.6% in Ireland compared to around 7.6% for the European average for the first quarter of 2021 Stakeholders want to recognize, or not, a central principle of the future sustainability of our retail banking sector.

Ireland needs a profitable retail banking sector that can fulfill its core mission of providing a wide range of credit, deposit and payment services to customers and society, an increasingly unique feature of banks retail amid the fragmentation of the financial services market here.

Retail banks grant loans to businesses and households for a total amount of 127 billion euros, including 822,500 mortgage loans. They hold € 270 billion in deposits, process around five million transactions worth € 3.7 billion every day and already play a crucial role in funding Ireland’s green transition.

But the retail banking industry is going through a period of unprecedented disruption, with accelerating digitization, changing customer trends and increasing competition from fintech and non-bank competitors who have entered selected segments of the banking market. .

Supervision of banks

The President of the Single Supervisory Mechanism (SSM) of the European Central Bank, Andrea Enria, who is responsible for the supervision of banks across the euro area and has a detailed view of their operations, cost base and of their profits, made it clear this year when he said banks would have to adapt to changing customer preferences and competition from new entrants in the fintech and big-tech market.

“If banks let these opportunities slip away, their business models will become increasingly vulnerable,” he said.

Research shows Irish retail banks have reoriented their business models and invested strategically to transform their businesses while keeping costs under control. They have collectively spent over € 3 billion over the past five years on technology and innovation in response to a rapidly changing market environment and increasing regulatory requirements. Last week, the Minister of Finance underlined the importance of investing in technology when he explained how “information technology is now fundamental for the provision of banking services in our country”.

There are a series of complex issues impacting the retail banking industry in Ireland and this review is to be welcomed as it provides a comprehensive analysis of them. Within the framework of the ECB, there is now a single EU-wide set of rules for financial services, to which Ireland subscribes, and in this context, the operating environment for banks in Ireland should not be be significantly different from the operating environment of banks in other euro area countries. .

Yet Irish banks have one of the highest capital requirements, face the strictest corporate governance and consumer protection rules, and the most restrictive compensation framework. A fairer playing field would be needed if Ireland is to create a stronger banking environment. Some issues in particular merit discussion.

Competence composition

The Irish retail banking sector is an exception in the EU when it comes to capital requirements, with our banks required to hold around three times as much capital for their mortgage portfolios compared to the European average.

The rapid digitization of banking services means that the skill mix within banks is changing, with retail banks requiring top-notch IT and digital skills to meet consumer and regulatory demands. Yet Irish retail bank workers face some of the most restrictive variable pay conditions in the EU and are clearly at a disadvantage compared to graduates and employees in other industries, including major tech and global fintech. , which are very present in Ireland.

Irish policy states that variable pay, including benefits such as health insurance and childcare, cannot be paid to any member of staff at any level, from the most junior upwards. These policies need to be reviewed, with a view to aligning with existing European rules on variable pay, if retail banks are to compete for the skills needed for their future transformation.

Given the scale of disruption and competition in the banking industry, and the degree to which new entrants are freed from traditional banking problems, it is crucial that retail banks can operate in an environment where innovation, skills, efficient use of capital and profitability are seen as key to their future sustainability. As we embark on this review, we need a debate that is informed, in the past of course, but which is firmly focused on the future role that the sector can and is playing now.

Brian Hayes is Managing Director of the Bank and Federation of Payments Ireland

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