Jim Power: Unclear whose interests Irish banks serve 

The fear now is that energy and food prices could start to accelerate again, for global reasons relating to China, Russia, and India to varying degrees.

The reason why central banks increase interest rates is to make borrowing more expensive and make savings more attractive, with the net result that money is basically taken out of circulation.

 The policy does appear to be working, in the eurozone at least. The ECB’s quarterly survey of bank lending this week shows that loan demand from business is at the lowest level in 20 years, and that loan demand from households is also weaker. 

No surprises there, and the results will not displease the central bankers in Frankfurt.

Here in Ireland, the face of banking has changed immeasurably over the past 15 years. We have seen a dramatic concentration in the market as a few players exit and the two- and a-bit incumbents are now becoming more and more powerful. Competition is suffering.

One gets the distinct impression the banks are not particularly interested in most of our business. Customer service in the branch system is dire and is reminiscent of the post offices back in the dreadful 1980s. The IT offering of the banks is not of a very high standard, with one of the Big Two lenders offering a lamentable service.

The Financial Times has reported on a study by S&P measuring the extent to which banks have passed on official rate increases to depositors. Of the 22 countries, UK banks were top of the table, passing on 43% of rate increases to depositors.

But guess what, Irish banks are bottom of the table, passing on just 7% of rate increases to depositors.

Bumper profits

Consequently, it should come as no surprise that AIB announced bumper profits in the first half of the year. If a bank is operating in a strong economy, is passing on such a low percentage of rate increases to depositors, is increasing rates to its customers, and has a strategy of cost-cutting, then it certainly does not take a genius management team to deliver strong profits.

The arguments about the salary cap are utter rubbish, given the lack of competition in Irish banking. This poses the question about the point and purpose of banks in the modern Irish economy. At a basic level the role of a bank is basic: namely, to act as an intermediary between savers and borrowers, and to do so in a trustworthy manner. This intermediation is crucial to the functioning of an economy, and small firms are not well served.

More competition is needed, but it seems clear that the State will have to be very involved. I have believed for a long time a State-owned bank that supports SMEs and start-ups is essential, along the lines of the old ICC.

It must be properly managed of course and cannot be run along the lines of RTÉ or Bord Pleanála, and I also believe that the credit union movement needs to be up-skilled, properly resourced, and enabled to provide proper competition.