Irrational banking, non-competition creating profits unexpectedly.

That banking in Ireland is a little irrational at present is a given, however, there are occurrences in the market which will change pricing structures in the near future, interestingly, by trying not to compete for business, several banks will ultimately make the market more profitable for all of the banks, achieving almost the opposite of what they had hoped to do.

I’ll explain, at the moment we have seen widespread Sovereign Credit Retrenchment, that’s a fancy way of saying that banks who are bailed out by certain countries are only really focusing on their indigenous markets because it is those markets that bailed them out. Irish banks have done this, Irish owned UK operations are closed. Equally, UK banks here are doing this by making their existing business rates higher and their new business rates exceptionally high.

Bank of Scotland’s new business variable rate is 6.19%, a whopping 5.19% over the ECB, they are doing this to avoid lending, and they are also paring back LTVs so that you have to have greater equity in the deal to borrow, in effect they have shut off the tap to lending.

Irish banks on the other hand are on the market with new biz rates of 2.25% which are totally out of touch with the ceiling rates that BOSI are selling, equally, we are in a harder credit environment and credit is scarce, scarcity value alone should make loans more expensive, currently it is only political will holding them down. However, at some point a happy medium will need to be reached, and for that to happen the Irish lenders will need to jack up their rates. Why would they lend at what are essentially discounts given the scarcity value of credit and the prices that competitors are charging?

The divide will be filled, and when that happens it means that margins on all lending will rise, and because of that we will likely see foreign banks start to lend again here because the proposition will be attractive enough for them to do so profitably, and by that happening it will be the inverse of their intentions, which are on the whole, to pull out of the Irish market where possible.

When margins rise considerably, and banks downsize to meet the ‘new normal’ in terms of capacity and market requirement, it will make for profitable banks, and thus, by trying not to lend, the banks will save their hide on the lending front. By closing the market they are in effect opening the market in the future.

When there are monopoly powers at play there is no need to find efficient pricing, or value, however, in the case of Irish banks, that is not the case, the only ones with money to lend are selling at rock bottom, and it isn’t due to economies of scale, and when they do start to charge more they can thank foreign tax payers for having given them the ability to do so, whilst being saved by indigenous tax payers.

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