'Big two' bank revamp 'will not lessen risk of failure'
THERE is a real risk that the creation of a banking duopoly between AIB and Bank of Ireland will not only reduce competition in banking but may also exacerbate the 'too big to fail' problem, which has seen banks rescued at enormous cost to taxpayers.
Two analysts from the Competition Authority told conference delegates it was "naïve" to think that unfettered competition was invariably a good thing in banking. But inadequate competition was bad for customers and the economy, and might induce complacency and more risk-taking by the banks, "safe in the knowledge that they are too big to fail".
Cathal Hanley and Andrew Rae said research in Britain suggested markets reckoned the value of implicit state guarantees at one year's annual profits for the banks.
"It is increasingly likely that competition will be distorted in future by these implicit guarantees becoming explicit under the 2008 legislation, unless policy curtails them," they said.
They disputed the view that a competitive banking system was inherently less stable than a concentrated one.
Studies had found a lack of competition in the Irish banking system, but it then proved highly unstable in the face of aggressive new foreign entrants.
The problem was not competition but poor regulation of the competitive process, they said. "Lax regulation and a sales-driven bonus culture moved banks towards the better profit margins available on commercial property loans.
"Blaming competition is to simplify the problem and consequently risk mis-diagnosis.
"A duopoly, complete with the accompanying moral hazard, creates an even greater incentive for the two pillar banks to continue previous imprudent behaviour," they added.
The controversial emergency legislation passed last year should be allowed to lapse when it comes up for renewal at the end of next year, they said, adding that the Government should try not to have emergency measures continue beyond that.