Is the Government deliberately running foreign banks out of town?

Discussion in 'Financial campaigns and consultations' started by Sarenco, Jun 21, 2017.

  1. Sarenco

    Sarenco Frequent Poster

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    In a response to a recent Department of Finance consultation exercise, Nationwide UK Ireland stated that the methodology for calculating the banking levy was undermining the viability of their Irish operations:-

    http://www.finance.gov.ie/sites/default/files/Nationwide UK for publication.pdf

    NUK Ireland subsequently decided to close their Irish operations.

    RaboDirect expressed similar concerns. According to their response, they are shouldering 3% of the overall cost of the bank levy, with only a 1% market share:-

    http://www.finance.gov.ie/sites/default/files/Rabobank for publication.pdf

    Is there a danger that Rabo will follow NUK's lead and exit the Irish market? There has certainly been some recent speculation on Rabo's future plans:-

    https://www.askaboutmoney.com/threads/is-rabobank-preparing-to-leave-ireland.202672/

    Bear in mind that these banks do not participate in the Irish deposit guarantee scheme and impose no contingent liability on the Irish taxpayer.

    Is the Government deliberately trying to restrict competition in the deposit market in order to artificially boost the net interest margin of the domestic banks in which holds a stake?

    TBH, I'm surprised this hasn't been picked up by any financial journalists - this is all publicly available information.
     
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  2. Sarenco

    Sarenco Frequent Poster

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    By way of background, the bank levy was introduced in 2013 for three years with a view to raising aipproximately €150m per annum.

    It was initially levied on all deposit takers operating in the State at a rate of 35% of the DIRT remitted to the exchequer in 2011.

    The last Finance Bill extended the levy to 2021. However, critically, from 2017 the tax is levied at a rate of 59% (yes, 59%) of the DIRT remitted by each deposit taker to the exchequer in 2015.

    Obviously this benefits the (largely domestic) banks that paid the lowest deposit rates in 2015 and penalises (the largely foreign owned) banks that competed successfully in the deposit market.

    Cui bono?

    Not the consumer. That's for sure.
     
  3. RedOnion

    RedOnion Frequent Poster

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    I tend to agree that the calculation if the levy being based on amount of DIRT return is unfair, particularly as some banks have a disproportionate share of DIRT exempt accounts, (plus non interest bearing accounts). However I believe a larger factor in NUK leaving the market us that Euro funding is of no value to them, as the asset side if their balance sheet is primarily GBP. Post Brexit the cost of hedging currency risk is too high.
    There's also a lot of cheap funding available in the market without the high cost of running a foreign operation.
     
  4. Sarenco

    Sarenco Frequent Poster

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    Well, NUK originally set up an Irish operation back in 2008 to attract euro deposits and to benefit from ECB liquidity facilities. It may well have been inevitable that NUK were always going to exit the Irish market at some stage but the same hardly holds true for Rabo's online platform.

    Why are these foreign banks paying any levy at all to the Irish State? They had nothing to do with our banking collapse.
     
  5. RedOnion

    RedOnion Frequent Poster

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    Re Rabo, in my experience banks aren't in the habit of shutting down profit making business units.

    I thought the purpose of the levy was to go towards the cost of regulation, so it's not a payment to a black hole in the state?
     
  6. Sarenco

    Sarenco Frequent Poster

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    Well, neither Rabo nor NUK are regulated by the Central Bank and do not participate in the Irish deposit guarantee scheme. The levy payment certainly disappears into a black hole from their perspective.
     
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  7. RedOnion

    RedOnion Frequent Poster

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    The banking levy and DGS are completely separate things, separately funded.
    Both institutions you mention are regulated by CBI for conduct of business rules, which their banking levy is supposed to pay for. They do not contribute to DGS in Ireland because they operate under their own countries schemes.
     
  8. RedOnion

    RedOnion Frequent Poster

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    By the way, Irish banks with operations in UK pay a UK banking levy, so it works both ways.
     
  9. Sarenco

    Sarenco Frequent Poster

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    Red Onion,

    The banking levy is not expected to pay for conduct of business rules! Whatever gave you that idea? It's a tax, plain and simple - it goes straight to the exchequer. This is not a funding levy paid to the Central Bank.

    Bottom line - how much of the Central Bank's time and resources are taken up with regulating Rabo's Irish operations? Practically zero. NUK Ireland? Ditto.

    I know NUK and Rabo benefit from their home state DGS. My point is that their Irish deposits are not a contingent liability on the Irish State - there is no rational justification for imposing an Irish levy on these banks.

    However, what makes this really problematic is the methodology for calculating the Irish bank levy - it is deliberately, in my opinion, constructed to benefit the domestic Irish banks.

    The UK banking levy excludes retail deposits and is calculated on the basis of a notional balance sheet of the UK branch of a non-UK bank. In other words, that's a complete red herring.
     
  10. MrEarl

    MrEarl Frequent Poster

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    Whatever about the government deliberately trying to restrict competition in the deposit market, it certainly isn't doing much to encourage it. Same can be said for encouraging new lenders into the market (despite the occasional bit of spin about wanting more competition in the Homeloan market).

    A State that is prepared to draft legislation instructing it's Central Bank to interfere with market forces in relation to the price of Homeloan rates, is capable of interfering with Banking in other ways also and this in itself is a deterrent to competition from foreign banks. It's either an open competitive market or it's not.

    Absolutely no doubt that the Government has a vested interest in helping to maintain the NIM of the Irish banks, given it still needs to divest from significant majority stakes in both AIB & PTSB, along with a minority stake in BoI. While the Government also has an obligation to do right by the population as consumers of financial services, it's very clear that it has a conflict of interest here (and I would imagine, would act first to try and facilitate offloading the banks to the private sector at best price (and hopefully repaying significant part of the national debt with the sale proceeds)). As for poor old Joe Bloggs the consumer, ah sure he'll be grand :rolleyes:
     
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  11. Brendan Burgess

    Brendan Burgess Founder

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    Hi Mr Earl

    You are a bit confused here.

    You don't want to seem to want any legislation which might interfere with market forces, even though those market forces have resulted in Irish consumers paying around about €800m in excess mortgage interest a year.

    Yet you have some sort of pity for Joe Bloggs?

    I am a great supporter of the free market, but where it's not working, then the state must interfere to protect those citizens.
     
  12. Brendan Burgess

    Brendan Burgess Founder

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    I have not followed the banking levy issue. But what alternative method of calculation would you propose?

    Or should we have a levy at all?

    Brendan
     
  13. RedOnion

    RedOnion Frequent Poster

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    I got the idea from the legislation that brought in the banking levy. These various levies only pay c. 50% of the costs of CBI regulatory / supervisory costs. It's nothing to do with DGS so linking the two isn't valid.

    The amount of levy these institutions have been paying is relatively small compared to their overall cost base here -i doubt it's factored much in their strategic decisions to get out. Rabo can replace the deposit book they had here at negative rates elsewhere. It's not significant enough to have any impact on their liquidity calculations. NUK took a bath on FX hedging costs post Brexit making the deposits here too expensive. Plus they don't need the funding - they also shut down their IOM operations around the same time which has nothing to do with the Irish banking levy.

    I agree Irish banks have a weighting of non DIRT paying accounts, and lower interest rates, and it's not the correct basis for calculating the levy.

    However if you look at Rabo's submission, their main point is that it's based on historical numbers so disadvantages those reducing their deposit base here. They had already made their decision.

    There won't be any competition in the market until funding supply dries up a little; banks can currently fund at negative rates wholesale, so apart from needing to meet liquidity requirements they'd prefer not to have any deposits!
     
  14. Sarenco

    Sarenco Frequent Poster

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    The bank levy has nothing to do with funding supervisory costs. You are confusing it with supervisory levies imposed by the Central Bank which are completely separate from the bunking levy.

    The banking levy certainly has nothing to do with the DGS - that's really my point.

    According to their submission NUK paid €10m over 5 years under the banking levy. That's hardly an insignificant cost for a one branch operation. Rabo are paying well over €3m a year and their low cost model is entirely online. Again, for what?

    Of course there are various forces contributing to the current lack of competition in the Irish banking sector. Unfair taxation shouldn't be one of them.
     
  15. RedOnion

    RedOnion Frequent Poster

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    Sarenco,

    Apologies, you're correct I'm mixing up the banking levy with the central bank industry funding levy.

    I agree with you that the basis of calculation of the levy is not 'fair'. Take a look at PTSBs submission for an alternative view (their funding base is a little different to the larger banks).

    Looking at Rabo, when they stopped taking corporate deposits, suggestions were this impacted 300 customers with 2bn deposits. These were mainly non DIRT accounts, so have no impact on the banking levy calculation, so wasn't their reason for getting out of this.

    You could also ask what are the Irish banks getting from the levy?
     
  16. Sarenco

    Sarenco Frequent Poster

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    Reduced competition?:)
     
  17. Sarenco

    Sarenco Frequent Poster

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    Well, we shouldn't have a levy at all if we are interested in reducing the cost of banking products for consumers.

    But if we do have to have a banking levy, it should be calculated on the basis of the scale of each deposit taker's operations in Ireland - not as a percentage of the amount of DIRT remitted to Revenue.
     
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  18. MrEarl

    MrEarl Frequent Poster

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    Last edited: Jun 22, 2017

    Hello Mr. Burgess,

    No, it's not that I am a bit confused here - its that I want to see things done differently (and dare I say, better).

    I believe in the free market and believe it is the government's job to legislate to facilitate that, but also ensure that it's citizens are treated fairly.

    That means the government alongside the Central Bank ensures that legislation and codes like the CPC or CCMA are fit for purpose and respected by all, but it also means that the government ensures there is correct legislation in place to enable a Bank to enforce it's security in an efficient manner when things go wrong with a borrower who can't / won't repay (subject to having first engaged properly, genuinely tried to restructure etc.). It further means that the government accepts that competition will dictate lending rates and so the government should not interfere.

    Ireland is a positive economy, with property in high demand, a young population, growing work force etc. This is all very attractive for potential new lenders considering entering the Irish market and once they enter, they in turn will push the lending rates down (just as we saw years ago with Danske, BoS etc.).

    If the government really wanted to help poor old Joe Bloggs, why not put an end to the money lenders advancing short term loans to the less well off at 243% pa or whatever they might be charging these days ? Why not set up a proper micro finance type institution, run along similar lines to those in parts of Africa (i.e. Kiva), to genuinely help those who desperately need money but don't meet traditional lending criteria ? Why not take immediate effective steps to ensure more housing supply is brought to the market (and so deal with housing needs, ease pressure on house prices) ? .. the list goes on :)

    Sorry, I know I have gone a little off topic here but hopefully you will take my point in terms of where the government should be actively involved in legislating for banking and where it needs to stay completely out of banking.

    I guess this may also have given some ideas for some new threads - discussion on potential micro finance in Ireland, why foreign lenders are not opening for business in the Irish homeloan market and so on.
     
    Last edited: Jun 22, 2017
  19. thedaddyman

    thedaddyman Frequent Poster

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    The levy is a tax and it's stated purpose was to enable the financial services industry contribute to economic recovery. Of course the foreign banks objected to it but I doubt very much if it was the sole reason why NUK pulled out and Rabo may be thinking about things. KBC in their response to the public consultation stated that 5 institutions were paying 96% of the bill and logic would state that since this is a DIRT based tax and that the bulk of Irish savings sit with the traditional domestic banks, they are paying the bulk of the cost.
     
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  20. Sarenco

    Sarenco Frequent Poster

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    Whether or not the bulk of the banking levy is being met by the domestic banks is not the point - it's the proportion of the levy being met by each institution relative to the scale of their Irish operations that matters.

    If we continue to discourage competition in the banking sector, we will continue to pay a high price for banking products. Threatening to introduce price fixing legislation simply exacerbates the problem.