Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I thank the Leas-Chathaoirleach for the opportunity to discuss the future of banking. I will open this discussion by updating the House on what I see as some of the key issues: the impact of Covid-19 and our response; the changing retail financial sector environment and the challenge for banks to secure an appropriate return; and the continuing effort to improve regulation and rebuild trust in the banking system through measures such as the senior executive accountability regime, SEAR.

The pandemic has posed significant challenges for our society and economy and many households and small businesses have been especially affected. The Government recognises the difficulties the pandemic has caused and has put in place a range of important and necessary supports for households and businesses. However, it was also important that the banking industry acted, and was in a position to act, to provide necessary support to its customers at the outset of the pandemic. In March of last year, I engaged with the Banking and Payments Federation Ireland, BPFI, to ensure that these supports would be put in place. In response, the BPFI announced a co-ordinated approach by members to support customers. The range of supports included payment breaks of three and, later, six months. Since then, payment breaks have been approved on more than 172,000 Irish accounts, meaning that a large number of borrowers have received important cash flow supports during the public health crisis. It was welcome that, as the system-wide payment breaks came to an end, the majority of borrowers were able to resume full loan repayments. Of course, many borrowers are still impacted by the pandemic and they will continue to need, and will be expected to obtain, assistance from their lenders.

It is also important that lenders support new borrowers and continue lending into the economy. While the pandemic had an immediate impact on the scale of new lending and there was a significant decline in mortgage approvals and lending during the middle of last year, the number of approvals and amount of lending has picked up significantly since then.

For the banking system, Covid-19 is the most significant shock it has faced since the financial crisis. It has helped that banks are more focused on the Irish market and have more stable sources of finance. At EU level, the regulatory and supervisory framework for banks has changed significantly since the financial crisis. Banks are now subject to more intrusive supervisory regimes, must hold more and better quality capital, and have enhanced reporting requirements. Other factors have also significantly helped to maintain stability at this difficult time. While the banking sector has undergone a huge transformation in the years since the crash, unfortunately, during those years we have seen evidence of unacceptable behaviour on the part of banks and people working within them, particularly in the context of the tracker mortgage scandal. It is for this reason that my Department is working on the SEAR legislation, which will place obligations on firms and senior holders within them to set out clearly where responsibility and decision-making lie. There has been lengthy engagement with the Attorney General's office and the Central Bank to ensure that the legislation is effective and constitutionally robust. It is my intention to publish the heads of the Bill before the summer recess, subject to any engagement with the Attorney General on the detail of it.

In order to keep up with developments in the lending market and the new ways in which people are borrowing money, my officials have been working on a Bill to bring the providers of personal contract plans, PCP, hire purchase and consumer hire agreements within the regulatory remit of the Central Bank. I have been in contact with the finance committee which is currently undertaking pre-legislative scrutiny on the heads of the Bill and I hope to be in a position to publish the legislation soon after the committee completes its report.

In regard to the general operating conditions of the banking sector, this spring, we saw a number of announcements which give us cause to reflect on the sector's structure. Last month, KBC Bank Ireland announced that it is has entered a memorandum of understanding with Bank of Ireland which could lead to a transfer of its performing loan book. This announcement came quickly after the decision by NatWest to withdraw Ulster Bank from the Irish market and Bank of Ireland's decision to close branches across the country. These announcements illustrate that the operating environment for banks in Ireland is very difficult. The announcement by Bank of Ireland to close branches is evidence of the impact technology is having on banking and the way the public interacts with banks. Increasingly, banks are competing with new technology-driven firms regarding services that were previously the preserve of traditional banks.

There is considerable public demand for the wider roll-out of broadband such that people can more easily and conveniently transact their business, and banks are only one of the many businesses that are now conducting a greater share of their business online. While there is a demand for banks to develop their online services and there is a cost associated with this development, many people will still need or want to carry out their banking activities in person. It is 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. The landscape is changing and partnerships like this are important. There are new services, new ways of banking and greater mobility between services. When we look to improve the retail financial sector, it is important that we view the banking system as a means to help households and firms achieve their financial, economic and social needs.

While non-interest income revenue is facing challenges due to technological changes and greater competition from non-banks, low interest rates have also depressed banks' interest revenues. In addition, their cost base is high. Overall, this puts pressure on banks' profits, and, in turn, the attractiveness of the market. However, the same can be said for banks in many other countries. The impact of Covid-19, on top of weak economic growth in Europe and America, has been already seen in European banking, with consolidation and mergers in other European markets. In the European context, there is a view that the banking sector has too many participants and that there is a need for it to consolidate so that it can more efficiently provide services to its customers in a sustainable way and, in particular, there will be a need for banks to further improve the level of investment in technology. This is likely to be a particular challenge for small to medium-sized banks in various national markets as they attempt to manage the cost efficiencies and IT investment that are crucial in the new banking environment.It is easy to say there is a problem with the banking market but it is more difficult to say where the appropriate balance between competition and consolidation lies in the best long-term interests of the economy. While the Government would like to see a more robust level of competition in the Irish banking market, it must be borne in mind that in the early years of this century, the Irish banking market was a very competitive one but not sustainably so and I think it is also fair to say that, ultimately, it did not serve the best long-term needs of the economy or society. Sustainable and responsible competition in the retail financial sector is vital to ensuring that businesses and consumers have a range of banking options available when using financial services and accessing credit.

Looking to the future, the Government wants to ensure that the banking and financial system is one that will effectively contribute and support economic growth and employment. Ultimately, the banking industry should not be regarded as an end in itself but rather as a system that will serve as the means to help households and firms achieve their financial, economic and social needs. That is our starting point. To that end, the programme for Government sets out a number of banking areas that will be considered for the benefit of consumers and the real economy. This includes measures to help ensure a smooth transition of European Central Bank, ECB, monetary policy, to look at ways to increase the availability of long-term fixed rate finance and to continue to work with the banking industry and non-bank lenders to support customers during and after the Covid crisis. I look forward to hearing the views of Senators on this important topic and the proposals they have to improve the banking market in the overall interests of the economy and our people.