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Ulster Bank’s exit means idea of a third banking force must be put back on the table

4 March 2021

The state needs to turn from silent owner to activist shareholder and support PTSB in acquiring Ulster Bank as a single entity

After years of restructuring fatigue for staff and endless speculation, NatWest has decided to wind down Ulster Bank in the Republic.

The move will hit border counties especially hard where the bank for generations has been central to the business fabric of our towns from Louth to Donegal. The impact on staff and communities will be considerable.

Since the review was announced last September, Paschal Donohoe, the Minister for Finance, has at least been consistent. Ulster Bank’s future is a commercial decision for NatWest to make, he repeatedly told me in the Dáil. This was blindingly obvious, but misses the point.

We cannot ignore the fallout and impact of Ulster Bank’s departure. We already have major problems in our banking sector. Even with a full-service high street bank with the scale of Ulster Bank in the market, interest rates on mortgage and SME loans are stubbornly high and charges are creeping up.

In 2018, Mario Draghi, the then president of the European Central Bank, observed that the Irish system portrayed all the characteristics of a “quasi-monopoly”.

As any customer on the lookout for value will tell you, he wasn’t wrong.

The departure of a familiar household name from an already tight market will make it worse. Competition worth the name barely exists in Ireland. Fewer than 3 per cent of customers switched their mortgages over six months in 2019. While in 2018, just 0.03 per cent switched their current account to another bank. This tells us a lot about the nature of the “market”.

The real danger now is that the withdrawal of Ulster Bank will only serve to strengthen the dominant position of AIB and Bank of Ireland. It is the staff of Ulster Bank and Irish customers who will suffer most in the meantime.

It seems that everyone agrees banking competition is a good thing for our country. That’s settled.

The question then is how can this be delivered in the public interest and in a way that will support economic recovery?

We know that the Irish banking market appears not to be an attractive proposition for most full-service international retail banks. There are many reasons for this including the ECB requirement on our banks to hold considerably more capital reserves than their peers.

And many of the reasons given by Ulster Bank to explain its departure will not have helped to make the case for new entrants any more appealing. This is where an activist state comes in.

The arrival of fintech firms like Revolut and others have been welcome additions to the scene. Such disruptive technologies and offerings will play a big part in our future, but will not replace nor provide a full banking service.

Where there is market failure – in this case a failure in terms of real and substantial competition in the banking sector that is likely to become even more acute – there is an onus on the state to step in to address it.

The concept of a third banking force in Ireland needs to come back on the table.

On this front, the Minister for Finance has more options at his disposal than he seems prepared to accept. The future shape of our banking system will depend on how he responds.

Owning 71 per cent of AIB and three-quarters of the shares in Permanent TSB is quite a responsibility. Correctly, no minister should be involved in the regular day-to-day commercial activities of these institutions.

On matters of supreme national economic and strategic importance though, a radically different approach is required.

The Department of Finance needs to turn from a silent owner into an activist shareholder that must be prepared to convert the abstract concept of a third banking force into reality.

Instead of allowing the piecemeal purchase and break-up of various parts of Ulster Bank, wouldn’t our shareholding be put to better use by supporting PTSB to acquire the bulk of the exiting bank as one single, virtually intact entity?

We also need to think anew about the wider role of public banking more generally.

The German Sparkassen model should be revisited, and how best can our strong credit union network and An Post play a role in financial services and economic development.

Out of this turmoil has come an opportunity to recast the banking landscape by putting the state’s interest in certain institutions to imaginative use.

I hope the government has the vision to use its pivotal role wisely and productively.

Ged Nash is a Labour TD for Louth & East Meath and is the party’s finance and public expenditure spokesperson