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Why are banks leaving Ireland? Is economy on the verge of collapse?

DUBLIN: Ireland seems to be unsatisfying to banks, as they are leaving their operations here. Ulster Bank, Bank of Scotland Ireland, Rabobank, Danske Bank, and finally KBC Bank. It looks like more private financial institutions will be on the list in the coming months.

With the surprising news that KBC Bank is in talks to combine its lending portfolio and liabilities with the Bank of Ireland, there is a growing perception that something unusual is happening in the country’s banking market.

The question of why these banks are leaving Ireland is now the subject of debate throughout Ireland. Several reasons can be cited for these banks’ departure from the Irish banking market. However, it is up to the government to address all these.

Low interest rate… Low profit

The main attraction is that interest rates are currently at record lows internationally. Due to the previous financial crisis and the impact of the current COVID-19, interest rates have remained the same for some time. Therefore, the margins and profits of banks and other lenders are very low.

Ireland’s situation is worsened by the country’s “rich” tradition of low interest rates and non-profit tracker mortgages. These are the ones that Irish banks still hold in large quantities.

Capital

Another hurdle for banks is the amount of capital they can hold compared to their international peers. For more than a decade, the impact of the previous financial crisis has continued here. But they have made progress in reducing them. However, Irish banks have worse debt than most European peers.

Shareholders cannot make a profit

Due to the rise in debt, Ireland now has the eurozone’s fourth highest Core Equity Tier 1 ratio, 19.1 percent (the highest quality of regulatory capital). The average in the Eurozone is 14.4%.

There is also the possibility of turning this additional tied up capital into non-repayable cash that shareholders cannot earn more by lending. Banks do not like this, which was one of the reasons for the closure of Ulster Bank.

Repossessions

In order for a banking system to function properly, the bank must be able to retrieve money if it is not repaid by the borrowers. But bankers have been complaining for years that the legal system in Ireland makes it very difficult to recover assets from defaulting customers. For this reason, the rate of home repossessions in Ireland is very low by international standards.

Research by ratings agency Standard & Poor’s revealed that it takes about four years to complete the entire legal process for repossessions in Ireland. In the UK, Denmark, Norway and Sweden the duration is 18 months.

Costs

Another factor is that operating in the Irish market is costly. Banks claim that the cost of doing business in Ireland has increased significantly in recent years. This is due to the supervisory fees and other levies charged by the Central Bank, the European Central Bank and the country to cover the costs of financial regulation.

In 2019, AIB, Bank of Ireland and Permanent TSB spent an estimated €268 million on such fees. In addition, retail banks pay revenue commissioners €150 million a year as a financial institution levy.

Demand for lending is weak

The demand for lending in Ireland has been relatively weak in recent years. This is due to the gradual recovery of the Irish economy and its reluctance to borrow. Compared to other economies, Ireland is a small market. So it doesn’t have the capacity to handle many large players.

The Irish market has traditionally been dominated by two large banks – AIB and the Bank of Ireland. A number of other smaller lenders are trying to compete with these banks.

The COVID-19 pandemic has made the situation even more challenging. Most families and businesses want to save money instead of trying to borrow and spend.

Consolidation

Return on Equity – a key metric of profitability – was -5.23% for Irish banks at the end of September last year. This is the lowest rate in the European Union, with the EU average being 2.19%. This trend has been going on since 2014. These challenges are not just for Ireland, but for banking across Europe.

This has been promoted by regulators like the European Central Bank. This is because they want to see smaller and more potential lenders and stronger institutions here. Banks have also been criticised for failing to handle investments carefully enough to avoid being a part of a recent catastrophe.

That being said, new players have recently arrived in Ireland, including Dilosk, Avant Money and Finance Ireland. Most of these banks are vulture funds with high interest rates and strict rules. However, the history of both Ulster Bank and perhaps KBC has been a bad experience for consumers, businesses and the economy.

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