When one lives through momentous change, it is often easy to fail to notice it happening. Irish banking is a case in point. Over the past decade or so we have seen a dramatic decline in the number of financial institutions operating in Ireland, and the banking landscape has been totally and utterly transformed. Names such as Anglo-Irish Bank, Irish Nationwide, Rabobank, Danske Bank and Bank of Scotland have all exited the market, and our memories in some but not all cases. Throw in on top of that names such as ICC, ACC, Northern Bank, National Irish Bank, TSB, and the scale of the change over an even longer time horizon has been even more striking.

After months of speculation and a growing sense of inevitability, the owner of Ulster Bank, NatWest, has announced that it is about to begin a gradual winding down of its operations in the Republic of Ireland. This does not come as a surprise as the owners have had to pump in around €17 billion to its operations on the Island of Ireland since the crash, and it has a cost base that is totally out of kilter with the other competitors in the market. Arguably, it is doubtful if the current operation could ever have been turned into a slick and profitable entity, not least because of the potential cost of the IT investment that the Bank needs. NatWest also argues that the onerous capital requirements in the Irish banking market render it a less than attractive banking market in which to operate in. This is a legacy of the banking crash and is one of the reasons why Irish mortgages are so expensive relative to many Euro Zone countries. It is unlikely to change anytime soon, particularly with the dark spectre of COVID-19 hanging over the Irish economy.

Despite this sense of inevitability, the exit of Ulster Bank from the Irish banking market is bad news on many fronts. Ulster Bank is the third largest mortgage and business lender in the Irish market. It has a loan book of around €20.5 billion; it accounts for 15 per cent of the mortgage market, or around €14.5 billion; it has around €4 billion in SME lending, equivalent to 20 per cent of that market; and it holds €22 billion in deposits, including a small one from the author of this piece. Of greater note is the fact that it has been in Ireland since 1860; it has 88 branches; it employs 2,800 people; and it has 1.1 million customers. All in all, it has been and continues to be an influential player in the Irish banking market. Alas that is all about to end.

The spin being put on this is that it will be a gradual winding down of the operation and that it will be managed in an ‘orderly and considered manner’, whatever that means. It is hard to see how it can possibly operate as a proactive force once a decision has been taken to shut it down. Why would one enter into a business arrangement with an institution that has a relatively short shelf life?

The possible sale of part of the commercial loan book to AIB, and of certain retail and SME assets, liabilities and operations to Permanent TSB is noted, but this will not solve the fundamental problems that will be caused to the Irish economy and Irish society due to the exit. Indeed, AIB will assume an even more dominant position in the market if it buys these assets. The sale of some assets to so-called ‘vulture funds’ is also not a very enticing prospect. All in all, it is hard to see too many winners out of this.

Following the announcement, we have effectively been left with the sort of banking model that those of us of a certain age grew up with. That is a model where two players dominated the market, and a couple of other smaller ones struggled to gain any real traction. AIB and Bank of Ireland now control around 60 per cent of the Irish banking market and effectively have a duopoly, with all of the negatives that inevitably flow from such a market structure. With the exit of Ulster, this duopoly domination will be accentuated.

Competition in any market is generally good for the consumer, provided of course the competitive structure is regulated properly. In September 1999, one of the most dramatic developments in the history of the Irish mortgage market occurred when Bank of Scotland entered the market with a variable mortgage rate of 3.69 per cent, compared to an average variable mortgage rate of 5.17 per cent at that time. The new entrant made a pledge that it would not charge a differential of more than 1.5 per cent above the official ECB rate. By December of that year the average variable rate mortgage differential over the ECB rate had narrowed to just 1.14 per cent, compared to 2.86 per cent before the new bank arrived. This is an example of how competition can help the consumer.

Of course, this competition eventually helped fuel a property bubble and a banking collapse due to a total failure of Central Bank regulation. The key points are that competition does benefit the consumer, but that competitive forces do need to be properly regulated in any market.

The question now is what can be down to prevent greater market concentration and the negatives that flow from monopolistic tendencies. Is it possible that an outside player could now enter the Irish market and shake it up? Highly unlikely. The other option would be to create a meaningful third force. The state still owns 75 per cent of Permanent TSB. So, the question is if this could be somehow linked up with the Post Office and credit unions to create a national banking institution? It would not be easy and would require considerable capital investment. In addition, the State’s 71 per cent holing in the ordinary shares of AIB probably complicates the situation.

However, the bottom line is that something needs to be done. I particularly worry about what might be in store for many smaller businesses who are already struggling as a result of COVID-19 restrictions, and who may struggle to get a bank to support them.  The Government has some big decisions to make, but make them it must.