I move:
That Seanad Éireann, mindful of the wide benefits that could flow from greater competition in retail banking, calls on the Government to facilitate and actively encourage the early emergence of a third major banking group through the operation of commercial forces in the marketplace.
I welcome the Minister for Finance to the House. He attends this House regularly but I appreciate his attendance here because this motion is important enough to deserve to be considered as opposed to last minute attention.
Essentially, this motion is about competition, so let me begin by saying a little about my views on competition. I believe competition is and should be the main engine of business growth. It is the most effective item in our toolbox to stimulate an efficient business economy which delivers what customers need. These beliefs are not ideological ones; they are purely pragmatic. I attach no mystic significance to the concept of competition as such; I see it purely as a means to a desirable end.
My beliefs are based firmly on my observations on what works and does not work in business. In my experience competition is a powerful motivating force — perhaps the most powerful one. It motivates companies because it gives them the best possible reason to be good at their jobs, put the customer first and have the lowest prices possible.
In my experience competition is also a powerful sanitising force. Without competition, businesses tend to get lazy. They tend to look inward at themselves rather than outward at the real world. They give in to the temptation of suiting themselves, not their customers. They become inefficient and lose their cost-effectiveness.
For companies that suffer in any of these ways a strong dose of competition is a very good thing indeed. Overnight, they have to transform themselves or risk going to the wall. That is why it is good that so many State companies are now being forced out into the competitive world. The EU is a factor in this, of course, as it pushes through the liberalisation of sectors, such as telecommunications and air transport; but I think the Government now acknowledges that full and open competition in the public sector is a desirable thing in itself, regardless of any pressure from the EU.
This motion before the House tonight springs from the belief that full and open competition is equally desirable in all parts of the private sector too. One part of the private sector which does not have satisfactory competition is retail banking, which in Ireland is dominated by a virtual duopoly of the two biggest banks: Bank of Ireland and AIB. There are other banks, of course, but they lack the critical mass which the two big players have. None of the smaller banks can compete effectively with the two big ones unless they grow considerably beyond their present size and the only way a smaller bank can grow in that way is by acquisition.
Let me demonstrate how the Irish banking customer suffers from the existing situation. If we look at the gross margins achieved by the Irish banks and compare them to the gross margins in other marketplaces, we see an interesting pattern. The gross margin is the difference between what banks pay on average to borrow money and what they earn on average by lending it. Just as in every other business one buys and sells, they borrow and lend. In Ireland that gross margin is higher, much higher, than it is in the UK and it is much higher than it is in the US. I picked those two comparisons because those are the markets in which the Irish banks have themselves been players. When they operate in those countries, they must accept a far lower gross margin than they are able to impose on their Irish customers.
In reality, any comparison one makes between Ireland and any other country will show exactly the same pattern — the gross margin is higher in Ireland. My contention is that this disparity flows directly from the absence of sufficient competition in the Irish retail banking market. It was recognition of facts like this that led to the idea of a third banking force. If there was a third player big enough to compete on equal terms with Bank of Ireland and AIB, the competitive pressures would be greatly increased to the immediate benefit of the customer, especially the business customer.
Also behind the idea of a third banking force was the notion that Irish businesses were being held back by a less than entrepreneurial approach on the part of the two big banks. Increase the competitive pressure, the argument goes, and banks will compete seriously with each other to lend funds to Irish business; in this way one stimulates economic growth. The present lack of effective competition in banking, many people argue, is holding back our growth.
The key question and the nub of this debate is; how do you bring about a third banking force? You can do it in one of two ways: you can either have the State do it; or you can let market forces do it. Many of the people who originally advocated the third banking force wanted the State to do it. I was one of their number when I was chairman of An Post and I argued the possibilities of doing so — I have now changed my mind. Those who advocate a State-owned third banking force wanted to throw together ACC, ICC, TSB and An Post to create a massive State owned bank to stand up against Bank of Ireland and AIB.
However, when they tried to make that happen, the flaws in the approach showed up right away. Those banks would not have mixed well together. Even if they had, they would not have produced the kind of animal that would compete effectively with the two big players. There were other flaws, which I will come to later, but the important thing is that the idea of creating a third force in banking through State intervention has failed. Whether people want to admit it or not, that is the reality.
Meanwhile, however, the need for a third banking force remains just as strong as ever and market forces are seeking to do what the State has been unable to do. Unfortunately, far from facilitating and encouraging this highly desirable process as I believe it should, it seems the State is actively seeking to frustrate it. This has come to a head over the issue of the sale of the TSB. There are potential buyers for the TSB and acquiring the TSB could take a buyer a long way down that road to where it could compete effectively with the two big players.
The TSB wants to go along that route. It has done its strategic thinking and knows teaming up with another retail bank makes far more sense than getting into bed with the likes of ACC and ICC. A solution is emerging, therefore, which is based on market forces and market realities. I believe we should be encouraging that way forward, not frustrating it.
The refusal to approve the sale of the TSB appears to be based on ideology rather than practical realities. It is not more competition which some people want; it is a State bank. I believe they are wrong and that the State would be no good at running a bank. There is always a great temptation to bring the State into banking, either by nationalising all the banks or by setting up State banks in competition with the private sector. Either way one would go a long way around the world to find a single example of this working well. When one nationalises banks, all of a sudden they become less efficient and less effective. They often start losing money where previously they made money.
France is a good example of a country where they have nationalised and denationalised banks like the swings of a yo-yo. They have not found that it worked or benefited the customers. It has ended up costing the French taxpayer a packet, as the recent example of Credit Lyonnais demonstrates very well.
What makes us so confident we could create a State banking force that could take on the might of AIB and Bank of Ireland on their own ground overnight? What makes us so confident that we could create a dynamic, thrusting, customer driven organisation from a merger of existing bodies?
The real danger is that a State bank would end up with all the bad business, leaving the commercial banks to cream off the profitable business. It is a crucial point which has not been made too often or strongly enough. A new State bank could have the effect of increasing the existing banks' profits while at the same time putting a burden of loss on the State and the taxpayer. Is that what we really want to do? Surely not. I can see the arrival of a State bank being welcomed by the two big banks as it would take all the nasty business they do not really want.
We must face up to some hard facts. A fully commercial third banking force would be no soft touch. Of course the State bank could be directed by the Government to have looser lending criteria than the other banks. One could direct it to make riskier loans. The inevitable consequence is not just that a State bank would lose money — perhaps a mountain of money — but that it would attract all the bad risks like flies to a honey pot. The existing banks would be delighted and one would find them refusing people and businesses loans more readily in the knowledge that there is a State bank of last resort which is ready to handle all that rubbishy business. That is why the concept of a third banking force run by the State is fundamentally flawed. It would end up making things worse, not better.
However, the thought behind the idea is sound. The banking sector does need more competition and competition is the customer's best friend. We are still living with the hangover of the old banking cartel which effectively removed choice from the customer and left too much power in the hands of the banks. What the State should be doing is encouraging more competition, not by providing the competition itself but by creating the conditions under which competition can flourish. I suggest that needs immediate action.
