I am sharing time with the Minister of State, Deputy Fleming. I welcome the opportunity to make a statement on banking matters. This debate is both timely and needed because in the past fortnight, there have been three major announcements from our banks that have major consequences for our citizens and speak to the challenges that the banking industry, along with the country in general, is facing in the midst of battling this pandemic. I refer to 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 that is important to the Irish stockbroking community and its business model. I will say a word about all three announcements.
The NatWest and Bank of Ireland decisions are deeply regrettable for their customers and staff and the wider economy. Ulster Bank has a long history in Irish banking and it was a very sad day that such a point was reached. Nonetheless, these are all commercial decisions being made by the boards and management of private companies and reflect the wider challenges the banking sector is facing, not only in Ireland but also internationally.
Covid-19 has obviously posed many significant challenges for our society and economy, and many households, families 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 has put in place a range of important and necessary supports for households and businesses. The banking sector has taken action but there is a continuing need for it to be sensitive in dealing with customers and to show flexibility at a time of such challenge. My colleague, the Minister of State, Deputy Fleming, will address the challenges of Covid-19 in more detail.
I will now address some of the specific challenges faced by banks. 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 what they were ten to 15 years ago in order to make the banking system safer and more robust. This is the reality 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 of them.
Fundamentally, a key aspect of banking concerns taking risk, including in regard to deciding who should and should not receive credit, and at what interest rate, and this is not the business of the State in a modern economy. We should also acknowledge, however, that our experience and that of many other countries has resulted in the entire governance and regulatory landscape being changed in recent years to ensure that banks would never be allowed to wreak such havoc and harm again. Private sector losses should never again be socialised, and we have made the banking system far safer in Ireland. However, there are consequences of the different changes in recent years for all stakeholders, including borrowers, depositors, bank staff and even shareholders. The various parts of the banking business model are all interlinked, so we have to bear in mind that one measure will have knock-on implications elsewhere and 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. The question of interest rates, deposit balances and liquidity in general has risen in prominence significantly throughout the banking system in Europe as the ECB has continued to provide additional funds through its asset purchase schemes and long-term refinancing operations. This has been exacerbated by Covid-19, as households continue to stay at home and defer investment decisions. The application of negative deposit rates by the ECB has resulted in European banks incurring a consequent cost on deposit accounts, and Irish banks are no different in this regard. It is important to note that in passing on some of these costs, banks cannot differentiate between customers in different sectors and, therefore, the approach is taken to apply charges based on the size of the deposit balance.
The question of capital levels and how they impact decisions made by banks has also been in the news recently. There has been wide coverage of the rates charged by Irish banks on both mortgage and SME loans, highlighting that they are among the highest in Europe. It is equally critical, however, that this higher level of capital has meant that banks are now safer and not overleveraged and that, unlike at the time of the previous financial crisis, the impact of Covid-19 has not posed questions for the stability of the banking system. It is important, therefore, that banks have a high and more robust level of capital. That is the foundation of a safe financial system.
Nevertheless, this will 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 result in higher credit and capital costs for Irish banks, which in turn affect the interest rate they have to charge on loans. At a wider EU level, the regulatory and supervisory framework for banks has changed significantly. Banks are now subject to more intensive supervisory regimes. They must hold more and better capital and have additional and strong reporting requirements. All of this is aimed at strengthening the resilience of the banking system to build capacity to absorb economic shocks, to weaken the link between sovereign and banks and to reduce the need for future State bailouts.
The Government wants to ensure the banking and financial system will effectively contribute to and support economic growth and employment. However, it also has to be profitable to do this. Profits are important for banks as a source of capital to support loan growth and to allow for investment in business, such as in expensive and needed ICT programmes. They are also important as a source of capital to support losses that inevitability arise in periods of economic stress.
Turning to Ulster Bank, its withdrawal from the market will be phased and take place over a number of years. There will be no immediate change for customers, therefore, with full banking services to continue on all channels for existing and new customers. This has been pointed out clearly to the bank's customers and the general public. As Deputies will be aware, NatWest is in early stage discussions with PTSB and, importantly, other strategic banking counterparties about their potential interest in certain retail and SME assets, liabilities and operations. Also, a memorandum of understanding that has been signed with AIB, regarding certain corporate and commercial loans, signals a potentially important development for the Irish banking sector, as do the negotiations under way between NatWest and PTSB. While these are commercial and independent negotiations, the Government is supportive of trying to bring about an outcome that is good for both AIB and PTSB but, more importantly, for existing Ulster Bank customers and staff and the economy generally.
In regard to the announcement by Bank of Ireland on Monday that it will close 103 branches in Ireland, 15 of which are in the North, it is important to acknowledge that as Minister for Finance, I cannot mandate or overrule the internal decision-making process in any bank, even one in which the State has a shareholding, which in this case is a minority one. Decisions in this regard are a commercial matter and the sole responsibility of the boards and management of the banks, which are run on an independent and commercial basis.
These decisions are further evidence of the impact technology is having on the way customers interact with their banks. Developing mobile communications allows more and more people to transact their business remotely. Banking is only one of many businesses that are now conducting a greater proportion of their business online.
As I did at the start of my speech, I absolutely acknowledge heightened local concerns arising from this decision. I also accept that many people will still need, or want, to carry out their banking activities in person. It is therefore 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 change and is moving towards providing financial advice, with some customers visiting their branches less frequently.
Yesterday’s announcement by AIB that it has reached an agreement to acquire Goodbody stockbrokers is a positive development for three important Irish companies: Goodbody, Fexco and AIB. It is positive for Goodbody because it 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 opportunity for AIB to deliver on its ambition to diversify its revenue in the interest rate environment which I described earlier and to 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. Critically for Fexco, which is an important employer in the south west, the proceeds it receives from the transaction will help it to continue to grow and to innovate in the financial services sector.
The standard remuneration arrangements in a stockbroking business are very different from those that pertain in a retail and commercial bank such as AIB and, reflecting this, the bank sought my consent for the continuation of the current 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, avoid duplication of activities and facilitate the integration of that business into AIB. There will also be a restriction on Goodbody hiring any person, in the open market or otherwise, with a total package above €50,000 who was an employee of AIB, or any company in the group, 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 finance.
Moving to the final development, I note yesterday’s announcement by the Central Bank of Ireland that it has fined and reprimanded Davy stockbrokers for regulatory breaches arising from personal account dealing. As I stated yesterday and again this morning, the behaviour has been detailed by the Central Bank and falls gravely short of the standards of behaviour that are expected of those 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 it has done so this evening and that it has said it deeply regrets "the shortcomings that emerged from the Central Bank of Ireland’s investigation” and has 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”.
Of course, there are many further banking challenges and problems which need to be addressed. With regard to the role of the banking sector in supporting our economy as we recover from Covid, I note that, unlike the situation a decade ago, the impact of Covid-19 on the banks has not called into question the stability of the overall system, which matters deeply for our ability to recover. The banking reforms introduced since the last crisis have, indeed, helped to maintain financial stability. The banks now operate more soundly and are guided by the Central Bank mortgage lending rules, which provide credit on a more prudent basis. They are now of a size that is more in line with the size of our economy and have higher capital levels and more solid financing.
While there are clearly banking challenges and difficulties both for the banks and those who depend upon them and work in them, whom I have acknowledged in my speech this evening, banks are now in a position to meet the challenges of Covid and its effects upon them and, in doing so, to be able to work with their customers to help them meet the real challenges currently before many businesses and households. They are in a position to respond in a flexible and sensitive way at a time when so many are facing great challenges and, in doing so, to put in place the kind of supports the Government's actions have enabled, which will allow for the first steps towards the recovery of our country and economy from the terrible economic harm of the last year.