EDITION 2 NOVEMBER 2005

From Macro to Micro

Depfa’s Journey

INSIDE

Banking Change International The Role of Pricing

and Consumer Financial Services in Retail Banking
Expectations in Ireland in Ireland
2 ABOUT BANKING
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 CONTENTS

2-4 Newsdesk ABOUT BANKING

ISSN 1649-6671
The latest news from the
Irish financial services sector About Banking is a publication
of the Irish Bankers Federation
(IBF). Opinions expressed in the
magazine are not necessarily those
of the IBF, its Council, Committees
or the Editor. Reproduction in
6-7 Banking Change and whole or in part without written
permission is strictly prohibited.
Consumer Expectations
Dermot Jewell The Irish Bankers Federation is the
leading representative body for
the banking and financial services
sector in Ireland. Membership
of over 60 institutions includes
licensed domestic and foreign
8-10 Delivering a World-Class Electronic banks and financial services
institutions operating here.
Payments Infrastructure in Ireland
The Federation of International
Anindya Roy Banks in Ireland (FIBI) and the
Irish Mortgage Council (IMC)
are affiliates.

President: Diarmuid Bradley

Chief Executive: Pat Farrell
12-15 From Macro to Micro:
Depfa’s Journey Irish Bankers Federation,
Nassau House,
Patrick Hughes Nassau Street,
Dublin 2
Tel: +353 (0)1 6715311
Email: ibf@ibf.ie
www.ibf.ie

16-17 International Financial Services in Ireland: Editor

The Next Phase of Development Felix O’Regan
ibf@ibf.ie
Sean Dorgan
Production
Patrick Hughes
patrick@phdltd.com

Advertising
18-20 The Role of Pricing
Deirdre Casey
in Retail Banking in Ireland deirdre.casey@ibf.ie
Brian Gannon
Design
Dcoy Design
www.dcoy.ie

Printing
22-24 Securing the Future Hudson Killeen

of Covered Bonds Cover Image

Paul O’Connor Courtesy of Tom McEnaney
NEWSDESK

Ireland needs to build on

success in international
financial services
Senior international banking executives called for action
to ensure that Ireland builds on its success as a centre for
international financial services at the recent Global Finance
Conference 2005 in Trinity College Dublin, which was
sponsored by the Irish Bankers Federation (IBF).
Pictured at the Global Finance Conference 2005 at Trinity College Dublin
(TCD): Pat Farrell, Chief Executive, IBF; Mary Robinson, President, Ethical
“Ireland has established an impressive footprint in Globalisation Initiative and Former President of Ireland; and Colm Kearney,
international financial services”, said Mike Ryan, Professor of International Business and Dean, Faculty of Business, Economics
Chairman of the Federation of International Banks in and Social Studies, TCD.

Ireland (FIBI) and Chief Executive, Merrill Lynch Ireland.

“It is crucial that we build on the successes of the past and
master innovation going forward. It is also essential that
we have a legal, fiscal and regulatory environment that
facilitates this.”

The central theme of the Global Finance Conference,

which brought together over 400 academics and senior
financial services executives from all over the world,
was Globalisation of Finance and Europe. It also provided
a unique opportunity to take stock of Ireland’s vaunted
position in the international financial services sector Deirdre Lyons, Head of International Financial Services, IDA Ireland, Donal
and the contribution of the sector to Ireland’s Forde, Managing Director, AIB Bank (RoI), and Mike Ryan, Chairman, FIBI,
economic success. share a joke at the Global Finance Conference 2005.

Meade outlines vision for

Ombudsman role
In one of his first engagements following his appointment as
Financial Services Ombudsman, Joe Meade outlined his vision
for the future role of the office at a seminar on complaints
handling organised by the Irish Bankers Federation (IBF) and
The Institute of Bankers in Ireland.

Pictured at the Complaints Handling Seminar: clockwise from top:

Joe Meade, Financial Services Ombudsman; Pat Farrell, Chief Executive, IBF;
Eimer O’Rourke, Head of Member Services - Retail, IBF; and George Treacy,
Head of Consumer Protection & Codes, Financial Regulator.

2 ABOUT BANKING
Banks and consumers jointly
press for ban on card surcharges
The Irish Bankers Federation (IBF) and Consumers’
Association of Ireland (CAI) have jointly called for a
Government review of card surcharges, which are imposed
on payments made by consumers using credit or debit
(Laser) cards.
The IBF and CAI believe that surcharging should be
abolished, or at least more closely controlled, because it is an
additional and unfair cost on consumers who pay by card -
a cost estimated to be in the millions of euro each year.
Also, it reduces consumer choice by discouraging consumers
from paying by card. Support for this campaign is being
sought of other key parties, including the Financial Regulator
and the Office of the Director of Consumer Affairs.
“Banks here are concerned that surcharges on card payments
may become even more widespread. We believe that the
only effective solution lies in national legislation to specifically
disallow surcharging”, said Diarmuid Bradley, IBF President.
Describing surcharges as “regressive”, CAI’s Dermott Jewell is
adamant that they must be resisted and outlawed.
Diarmuid Bradley, President, IBF and Dermott Jewell, Chief Executive,
Consumers’ Association of Ireland (CAI) join forces to fight card surcharges.
Harsha Shewaram, Internal Market and Services DG, European Commission
with IMC’s Chairman, Aidan Clarke and Secretary, Eimer O’Rourke.
IBF supports NALA financial
literacy campaign
The National Adult Literacy Agency (NALA) launched
a three-year campaign in 2004 to tackle financial
literacy, which research suggests is a significant barrier
to people accessing financial services. To support this
campaign, the Irish Bankers Federation (IBF) has donated
educational resources to promote financial literacy and
foster an early understanding of money, saving and
sensible money management.
These resources, which were originally designed for use in
schools, will be adapted for use with adults with literacy
and numeracy difficulties.
Speaking about receiving the Money Go Round packs from
IBF, Tommy Byrne, PRO with the National Adult Literacy
Agency (NALA), said “NALA are delighted to receive this
tuition and learning resource on behalf of the thousands
of adult literacy practitioners who will use it to support the
family literacy development work”.
NALA Public Relations Officer Tommy Byrne receives donated educational
resources from IBF Public Affairs Officer Deirdre Casey.
IMC engages Commission on
mortgage market integration
The Irish Mortgage Council (IMC), which is affiliated to the
Irish Bankers Federation, is working closely with its member
institutions to develop a detailed response to the European
Commission’s consultative Green Paper on European Mortgage
Market Integration.
Harsha Shewaram, National Expert, Retail Financial Services
& Payment Systems in the Commission’s Internal Market and
Services Directorate General met with the Council of the
IMC at its recent meeting to discuss the current stage of the
Commission’s consultative process.
ABOUT BANKING 3

Delivering what
consumers want
This edition of About Banking includes some forthright views
from one of our key stakeholders, the Consumers’ Association
of Ireland. It is important that we listen at all times to the views
of our stakeholders, obtain their insights into the challenges
facing our industry and commit to change where we recognise
its inherent validity and necessity.
This approach has served us well in recent times as we have
promoted important pro-consumer initiatives in a sector that
is delivering increased choice for consumers. The competitive
landscape for banking here has been transformed in recent
years and we now need an appropriate light touch regulatory
framework to allow the full benefits of this to accrue
to consumers.
Consumers can look back over the last few years and find many
things to be critical of in our sector but equally recognise many
more positive developments which have delivered significant
gains. Customers now benefit from increased choice and access
coupled with good and fair value as independently measured
against our European and global peers. Bread and butter items
such as personal current account transaction banking and
mortgages are just two examples of where the sector offers
excellent value.
Maintaining competitiveness is the key driver of
success for businesses in this economy. It’s important
therefore that banking plays its part in supporting
and enabling that success. We now have more
than 10 business banking providers of core services
in this market together with additional specialist
Pat Farrell,
IBF Chief Executive
Future of the IFSC
Elsewhere in this edition we have an interview with Gerhard
Bruckermann, CEO of Depfa Bank, headquartered in Dublin
since 2002. As one of the leading global providers of financial
services to public sector clients, Depfa is part and parcel of the
success story of international banking in the IFSC which now
plays host to 25 of the world’s top global banks. The IFSC has
been an outstanding success in the relatively short time since
its establishment in 1987.
The original IFSC tax regime which underpinned much of the
early success expires this year. This event serves as a timely
4 ABOUT BANKING
service providers, all offering significantly increased competition
and choice. Not surprisingly, a survey last year by Amárach
Consulting confirmed that transaction charges for business
banking in this market are considerably lower than in the UK.
The planned introduction of an IBF Business Switching Code
will act as a further spur to competition. A Project Manager and
Working Group are already in place and consultation with the
various business representative interests has commenced, all
with a view to having an agreed Code by the end of this year
and full implementation by the middle of 2006.
Since our last edition we have seen publication of the
Competition Authority’s study of the sector. We welcome
publication because, while we have been proactive in delivering
on a number of initiatives to enhance competition, other
developments have inevitably had to await the final report.
A substantial body of work has already been completed by
the sector aimed directly at removing any perceived obstacles
to increased competition in both the personal and business
banking markets. IBF Personal Switching Code launched earlier
this year has considerably raised awareness in this area with
some 10,000 customers having already switched using
the Code.
None of this reflects any complacency within the sector
regarding our current state. We clearly recognise that being
true to our mission statement - to foster the development of
a dynamic, innovative and stable banking and financial services
industry which contributes to the economic and social wellbeing
of the country - calls for a journey, not an event;
an inclusive rather than an exclusive view of the
world. Perhaps, most importantly of all, it’s a call
to action which demands a real commitment to
change; change that is already well underway.
reminder that we now need fresh thinking and renewed
commitment by all stakeholders to ensure continued success
in bringing the centre to the next stage of development.
The review of strategy for the development of international
financial services recently initiated by Dermot McCarthy,
Secretary General, Department of An Taoiseach, is most
welcome. Following through on this important step, we now
need early agreement on the way forward, clear accountability
for delivery and built-in measures of success - all vital to the
effective delivery of the new strategy.
 Banking Change and
Consumer Expectations
Dermott Jewell, Chief Executive, Consumers’ Association of Ireland
Change, almost without exception,
meets resistance. ‘If it’s not broken,
don’t fix it’ invariably comes hot
on the heels of an announced
decision for change. And this is
closely followed by the reality that
those who uttered this advice have
now been ‘dragged kicking and
screaming’ into the now - the future.
This is how the majority of
consumers view the banking industry,
and that is the nice version!
Trust, respect and support have been
withdrawn by those consumers who
have been made, through years of
entrenched immobility, to suffer a
serious lack of competition, the absence
of choice, and the consequences
of a loss of values and ethics. More
importantly, and the one which many
will never forgive, they were submitted
to the ultimate abuse - overcharging to
their personal loss and the gain of not
one but a number of these financial
6 ABOUT BANKING
monoliths that had posed as their
opinionated protector.
Competition
The first sign of change now is one of
attitude. The sector has gone into a
serious damage limitation and correction
mode and is trying hard to manage the
unforgivable. No tears - but there has
been apology, handholding and the
promise of more change. Those days,
they assure us, of oversights, glitches,
computer errors, mistakes, technical
faults, serious lack of communication,
an internal failure or the result of an
unfortunate series of events - are over!
The kicking and screaming part now
comes mostly due to the emergence of
that long elusive element of competition
I referred to earlier. The Danes are
invading again and, through their
acquisition of National Irish Bank (NIB),
are promising aggressive campaigning
and value to woo new customers.
Bank of Scotland (Ireland) already has
 “The CAI and the IBF have lobbied jointly before and will do so again.
This, I believe, indicates perhaps one of the most important
elements of change that has come about.”
a strong consumer goodwill factor and
will undoubtedly receive attention to
their offers as soon as they convert their
former ESB branch network. Add to
this the new RaboDirect offers and the
permanent tsb move to get in the game
with a challenging ‘free banking’ slap
in the face to the existing NIB offer and
we are starting to see the marketing
techniques actually beginning to
emerge that are geared to deliver long
awaited benefits to customers - not just
shareholders. Clearly, one of the most
intense signs of a change of direction
is the reduction by Bank of Ireland of
almost 20% of its workforce. With real
change clearly demanded, the level of
screaming from here is deafening.
So, let me strike some more positive
notes. The moves by some providers
towards free personal banking are
welcome. They are long overdue because
those ‘valued customers’ who have for
years maintained their accounts in credit
without receipt of any benefit deserve
some reward for letting the banks use
their money. The ‘valued customers’ also
deserve some significant monetary relief
or reward due to the fact that they now
use their telephones and computers,
at no cost to the bank, for maintaining
their accounts. The massive reduction in
usage of cheques alone provides massive
savings in office space and storage and in
staff resource costs.
The move by the Irish Bankers
Federation (IBF), willingly supported by
the Consumers’ Association of Ireland
(CAI), in lobbying the Minister for
Finance to remove the double taxation
of stamp duty on credit and ATM
cards on second accounts was a highly
significant one. Specifically so because
it brought the two bodies together,
singularly focused upon removing an
unfair tax on consumers of the service,
customers of the banks and already
overcharged citizens of the State -
well, in this area at any rate!
The CAI and the IBF have lobbied
jointly before and will do so again.
This, I believe, indicates perhaps one
of the most important elements of the
change that has come about. This is
because we can see in it a willingness
and determination to restore some of
the quality of the appreciation of the
customer that was lost. It also begins to
re-establish some of the quality that has
been eroded over the years of change,
closures, overcharging and denial.
Of course, that said, the business of
banking goes on. If consumers fail to
make their payments due to oversight,
error or internal failure they will continue
to be ‘strongly urged to rectify the
matter as a matter of urgency’ and also
advised that ‘penalties will (and shall)
apply’. That is fair enough, but the entire
landscape does stand on the brink of
more change. A change of attitude and
what will be for many a restoration of the
quality of service but to a very high level
of demand. This level will be compared
against the new entrants who will
undoubtedly raise the bar from the outset
and be poised to raise it even further as
the competition, expectedly, heats up.
This ‘quality’ will bring a focus on
charges, fees, commissions and
penalties. The ‘value’ to the customer
will be twofold in that consumers will
look to how much they can save, not
simply without incurring any loss of
quality of service or outlay, but more
through continual reward for their
custom and a personal form of attention
to their banking needs. Any marketing
executive will confirm that retention of a
customer is far more economically viable
than recruitment of one. That form of
‘spend’ - in real terms that actually is
visible to the customer - is what will
dictate the level of change here and the
initial limit of switching loss or retention.
Switching and consumer choice
This brings me to perhaps one of the
most significant of long overdue changes
recently introduced into the Irish banking
system - the facility, thanks to the IBF
Personal Switching Code, to switch
personal bank accounts with a limited
delay, red tape or cost for the ‘switcher’.
This is hugely significant because it
allows the market to really work and
lifts old and deeply- set barriers to
competition that had dissuaded so many
for so long. This has not so much been a
case of biting the bullet but rather a very
unique form of disarmament.
So, we see the way clear for new
entrants, new products, transparency
within charging structures and the
possibility for real value and innovation
across the spectrum of products and
service offers. How innovative, how
transparent, how strong in value and
how realistic these will be in their level
of charge to the consumer only time
will tell. Suffice it to say that many
are keeping a beady eye on progress
- especially on the rates and charges.
Innovation also has its potential for
problems and the offers of 100%
mortgages, easy access to credit and debt
management must all, of necessity, form
an integral part of this fast moving factor
of change. Otherwise it will be futile.
That path of future progress will be
significantly improved if a structure
of clear and understandable criteria is
adopted for every customer required to
operate and move within the banking
system. Consumers have the power to
dictate how rapidly that takes real shape.
However, two considerations need to
be borne in mind. First, consumers must
be proactive - having demanded it they
must avail of the change, use it and
mould it into their preferred state. And,
lastly, notwithstanding Caveat Emptor,
they should always be mindful that,
unless they do so, the odds will move
against them and dictate that, as far
as they are concerned, the house
always wins!
ABOUT BANKING 7
 Delivering a World-Class Electronic
Payments Infrastructure in Ireland
Anindya Roy, Senior Manager, Financial Services, Accenture
Developing our
electronic payments
infrastructure can help
address some of the
strategic challenges
facing the economy,
argues Anindya Roy.
The key message from the Information
Society Commission’s 2003 report,
“Delivering A World Class Payment
Environment”, is as relevant today as
it was two years back. This is that the
use of cash and cheque payments in
Ireland remains one of the highest in
Europe and this constitutes a substantial
cost to the Irish economy. In particular,
the relatively high prevalence of cash
payments has been linked to the fact
that a sizeable segment of the adult
population in Ireland does not have
8 ABOUT BANKING
access, for whatever reason, to the
payments system. As Figure 1 shows,
the relatively low number of total
cashless payment instruments per
capita in Ireland (76 per annum),
compared to the EU average (150 per
annum), reflects relatively high use
of cash payments. Ireland also has
the fourth highest usage of cheque
payments in the EU.
Armed robberies of cash-in-transit
vehicles, for example, have highlighted
the cost to society at large of a
continuing high level of cash payments.
This is reflected not only in the increased
cost to businesses and banks of handling
cash, but also the impact of criminal
activities on society at large. Conversely,
greater adoption of electronic payments
can lead to significant benefits to Irish
businesses and consumers, not just in
financial terms but also in broader
socio-economic terms.
Lower cost, wider choice, greater Such universal access to the payments In many ways, Ireland is well positioned
social inclusiveness system could therefore help to contribute to become one of the “best practice”
The most obvious financial benefit of to increased social inclusiveness. Also, countries globally in the area of electronic
cashless payments is the cost saving consumers could have more choice and payments. Our demographics - age,
arising from a reduced need to handle convenience in carrying out commercial education, income profile - are highly
cash or process cheque payments. transactions and availing of public service favourable for greater acceptance of
According to the Information Society delivery using electronic channels, such as electronic commerce and increased
Commission report, just these savings, on the internet or mobile phones. sophistication in the use of technology.
a gross basis, could potentially amount Over the last decade, there has been
to between €200 million to €500 million However, all of this can only be significant growth in electronic payment
per annum, or around 0.3% of GNP. achieved through development of volumes and many of the infrastructure
While there are a number of assumptions a world-class electronic payments elements of electronic payments. For
behind these estimates, they clearly show infrastructure which offers inter- example, the number of credit cards has
the very significant potential for savings. operability to payment services more than doubled, while debit cards
A pervasive, multi-channel electronic providers and convenience and choice have grown from zero to over one million
payments environment, enabling quicker to consumers. Such an infrastructure in a relatively short period of time. The
migration from cash and cheque to is, in fact, a critical component of the number of ATMs and merchant point-
electronic payments, could significantly overall technology infrastructure of any of-sale devices in Ireland, on a per capita
reduce the cost of providing electronic country and helps to contribute towards basis, is now comparable to or better
payment products and services and create sustaining economic growth and than many other EU countries including
opportunities for innovation. This would global competitiveness. Sweden, Germany and the Netherlands.
create a “virtuous cycle” that, in the
longer term, would benefit consumers The World Economic Forum, for example,
in many ways. For example, access to measures the development of electronic Alignment of stakeholder interests
cost-efficient banking, and ultimately to payments infrastructure as part of its Sustaining this growth in electronic
a wider range of financial services, could evaluation of the “network readiness” payments into the future and
be provided to traditionally underserved of a country - that is, its technology transforming the electronic payment
segments of the population by leveraging infrastructure and environment, infrastructure in Ireland presents a
a pervasive and low-cost electronic which is a key leading indicator of significant challenge for the many
payments environment. global competitiveness. stakeholders involved, including banks,
businesses, retailers, consumers, transport
operators, telecommunication companies
Figure 1: Use of Cashless Payment Instruments
(Number of transactions per inhabitant) and public sector agencies. Many of
these challenges are of a global nature
Credit Credit & Direct Cheques Card Total and it would be difficult to come up with
transfers debit card debits based
an Ireland-specific solution. In this regard,
payments e-money
there is a lack of clarity around common
Belgium 67 60 19 2.3 10.3 158 standards and inter-operability in many
Denmark 45 105 28 6.8 1.3 186 emerging electronic payments channels
Germany 69 27 64 1.6 0.5 162 such as mobile payments or smart cards.
Greece 1 5 1 2.4 nap 10
Spain 15 27 34 4.3 0.03 80 On the other hand, within Ireland
France 42 71 38 64 0.29 215 there are potential opportunities for
Ireland 10 38 10 18.7 nap 76
the stakeholders to align, integrate
Italy 18 17 12 8.7 neg 56
and/or leverage current and planned
Luxembourg 29 81 11 0.6 6.7 129
broader infrastructure initiatives that
Netherlands 78 74 61 neg 6.7 219
Austria 109 24 80 0.8 2.2 216
could transform the future shape of
Portugal 10 65 14 23.2 0.1 111 electronic payments here. Some of these
Finland 109 106 12 0.2 0.2 227 opportunities lie in the potential synergies
Sweden 48 84 15 0 0 147 between initiatives such as integrated
United Kingdom 37 87 41 37.9 nav 203 public transport ticketing, Chip and PIN
EU 43 49 38 20.2 1.2 150 roll-out of bank cards, use of smart cards
for identity, rollout of broadband internet
Source: European Central Bank, Blue Book Addendum, August 2005
access and of 3G mobile network access.

ABOUT BANKING 9
Delivering a World-Class Electronic Payments Infrastructure in Ireland
“The biggest regulatory challenge in payments for all eurozone
countries over the next few years is to realise the vision of
a Single European Payments Area.”
Recent experience in Asia has
demonstrated how different stakeholders
(including, for example, banks, mobile
operators, device manufacturers and
transport operators) can come together
to create value-added mobile payment
services for consumers, which are also
economically viable for the stakeholders.
Increasingly, the net result is that
mobile phones are used to pay for
an expanding range of products and
services, from train tickets to theatre
tickets, thereby substituting the use of
cash. Other examples exist of stakeholder
collaboration that create economically
viable alternatives to cash usage, without
necessarily requiring huge investment in
new technology. Pre-paid cards have been
extensively used in the United States and
in many emerging economies to provide
payroll services and social benefit transfers
for people without bank accounts. This
has involved collaboration between banks,
private sector businesses and government
agencies. Although such stakeholder
collaboration is by no means easy to
execute, it could be argued that, given
Ireland’s market size, a substantial level
of industry collaboration is a prerequisite
for progress with the payments agenda;
based, that is, on the experience of other
countries with comparable population
and economic size.
Single European Payments
Area (SEPA)
Of course, regulatory demand is another
key determinant of the future electronic
payments infrastructure in Ireland. The
biggest regulatory challenge in payments
for all eurozone countries over the next
few years is to realise the vision of a
Single European Payments Area (SEPA).
According to the European Central Bank
(“Towards A Single Euro Payments Area
- Third Progress Report”, December
10 ABOUT BANKING
2004) the progress towards SEPA is to be
marked by three phases/milestones:
1. January 1st, 2008: Payment
infrastructure in all eurozone
countries to meet target service levels
required by SEPA. Consumers and
businesses will have access to both
SEPA-compliant and existing/legacy
payments products and services
from banks;
2. January 1st, 2010: Convergence of all
eurozone payment systems and full
migration of all payments back-office
infrastructure to SEPA. All payments
products and services offered by banks
will be SEPA compliant;
3. Post-conversion period, beyond 2010,
when most/all volumes should have
migrated to SEPA.
While it is still unclear how the pan-
eurozone payments landscape will be
configured during 2008-2010 to realise
SEPA, some of the likely implications
are quite clear and significant. Since
businesses and consumers will be
provided with the same efficient service
standards at the lowest cost anywhere
within the eurozone, every country will
have to move towards a more efficient
domestic payments infrastructure if that
infrastructure is to remain economically
viable and relevant after SEPA conversion.
It is therefore in the interests of all
stakeholders in Ireland to work towards
a step change in the efficiency and
competitiveness of the electronic
payments infrastructure. This would also
have the additional benefit of enabling
multinationals and Irish businesses to
utilise their existing links into the Irish
electronic payments infrastructure in
order to process transactions across
the eurozone.
All of this points to the strategic
imperative of developing the electronic
payments infrastructure in Ireland over
the next few years in order to create a
more pervasive and efficient electronic
payments environment. It would address
a number of strategic challenges in the
medium term that are faced by the
economy as a whole: namely, reducing
use of cash, reducing paper processing
costs in the economy, creating wider
banking access to underserved segments
of the population and creating more
consumer choice and convenience
for electronic multi-channel access to
commercial transactions and public
service. It would also make Ireland’s
domestic payments infrastructure
economically viable and relevant in
the context of SEPA.
The National Payments Strategy is the
best means of delivering an electronic
payments infrastructure in Ireland that is
used and shared by all stakeholders in a
transparent way, ensuring competition
as well as opportunities for innovation
and growth. For this to be effective, it
is critical to have the right engagement
model with all of the key stakeholders
- including government - so that there
is a shared strategic vision, a realistic
road-map and a clear commitment to
make this happen. A collaborative effort
in this direction is already underway,
involving the Government, regulators and
the Irish Payment Services Organisation,
to provide a framework for delivery of
the National Payments Strategy and to
develop a protocol for wider engagement
with all stakeholders. It is imperative that
there is strong support and commitment
from all stakeholders to sustain and
further develop this process, so that the
transformation of Ireland’s electronic
payments infrastructure becomes
a reality.
 When we met Tom,
he was living in a damp
bedsit with no windows...

…he spent most days sitting in the library because his flat was freezing cold. Mould was
growing on the ceilings and walls.

We spoke to Tom’s Landlord and informed him of his legal obligations. Within a fortnight, Tom
was moved to a bright one-bedroom flat at the same rent. He doesn’t know himself now.

Threshold is a national housing charity that helps people solve their housing problems. Last
year, we assisted over 20,000 people like Tom.

Please donate to Threshold and support our work to help people in a housing crisis.

Threshold, 21 Stoneybatter, Dublin 7.

www.threshold.ie

CALL 01-6707003
 From Macro to Micro:
Depfa’s Journey
The state sized bank with a fresh view on development
Gerhard Bruckermann must be a happy man.
The bank of which he is Chairman and
Chief Executive, the IFSC-based Depfa,
has had yet another successful business year.
Yet to perceive the bank as solely a vehicle for
making large profits would be to misconstrue
its unquestionable ethos. Patrick Hughes met
Gerhard Bruckermann to find out more.
Depfa: The Background
Founded in 1922, Depfa was established
by the German government to use long-
term bonds to alleviate pressures in the
social housing sector. It was privatised in
1991, just two years after the fall of the
Berlin Wall.
By the time Gerhard Bruckermann
was on the board of Depfa, the bank
had widened its gaze to public sector
financing and other countries in the
European Community. It had a particular
desire to develop business in the English-
speaking world. “We chose to open an
office in Ireland for simple reasons”,
says Bruckermann, “the language, the
people, the IT infrastructure and the cost
of doing business here were paramount,
especially the low tax regime”.
Originally, the Irish office was established
as a subsidiary to deal with non-German
business. As this business grew and
12 ABOUT BANKING
grew, the bank turned the Irish office
into its global headquarters.
Microfinance
Compare and contrast. A global
bank engaged in state finance, with
not a single account holder. A local
co-operative operation, providing loans
of tens of dollars to rice farmers in
remote Cambodia. The two could not
be further apart in conceptual terms,
and yet the latter is at the heart of
Depfa’s ethos.
“For many years, Depfa didn’t
have a formulated policy on social
responsibility”, explains Gerhard
Bruckermann, “though we funded a
school for the blind in Germany since
the 1950s, and have been involved in
educational projects like Erasmus and
sponsoring initiatives around languages
and mathematics - core missions for the
bank itself”.
“Microfinance refers to small scale finance which provides loans on
a very local level to economically active people”

ABOUT BANKING 13
From Macro to Micro: Depfa’s Journey
“We can facilitate communities to take an element of their
future back into their own control, and the impact
on societies of that is and will be huge.”
The needs of local farmers in developing
nations are not an expected core
constituency for a bank like Depfa.
“I attended an event that we sponsored
at which Tom Arnold of Concern spoke”
explains Bruckermann. “I was hugely
impressed by his message, and decided
to find out if there was anything we
could do to help”.
The result? Depfa’s involvement with
Concern’s microfinance operations in
Cambodia. “Microfinance refers to
small scale finance”, says Concern’s
Chief Executive, Tom Arnold, “which
provides loans on a very local level to
economically active people who wish to
develop a small business or objective to
increase their livelihood options”.
Concern was already involved in
microfinance institutions (MFIs) before
Depfa’s participation, and Concern still
fully owns its microfinance facility. “MFIs
have a great impact on the communities
where they are available”, says Tom
Arnold. “For example, AMK Cambodia
grew out of community development
work, and became fully licensed by the
Cambodian Central Bank in 2004”.
How Microfinance Works
“Loan officers travel at regular dates to
communities where Concern offers MFI
facilities” explains Gerhard Bruckermann,
“and they extend small finance to
those who present themselves, collect
payments and move on to the next
community. AMK, for example, has
a Board that licenses individual loan
officers, who apply well thought out
lending criteria. The loan facility itself
is an extremely sophisticated, and
flexible, product”.
“The debt repayment ratio is much
higher than in Western societies at
around 98%. Interestingly, women make
up around 80% of applicants in some
14 ABOUT BANKING
regions, and that might be for a variety
of sociological reasons, including that
they are seen as being economically
more active”.
Depfa’s input to such projects combines
funding of €50,000 per month with
other important assets. “This kind of
finance has nothing to do with Depfa’s
business model”, states Bruckermann,
“but I wanted Depfa people to be really
involved in Concern’s projects”. He
himself has recently returned from a trip
to Mozambique to see other projects.
“This is now an integral part of the
work of the bank, not just in providing
financial advice, but also through our
people providing expertise like legal, IT
and audit services. This is now part of
our corporate culture.”
Concern and Depfa are involved in
developing nations such as Cambodia
and Mozambique. “In Mozambique,
the population has been utterly
ravaged by HIV/AIDS: facilitating
people to develop their own small
businesses is one step in the building
blocks of education that will alleviate
their situation.” New initiatives are
underway in Eritrea and Ethiopia.
“Such finance initiatives are unlike any
sense of banking as we know it,” says
Bruckermann. “They go into areas that
are fairly inaccessible, and where the
only previous facility was usurers or
money lenders, charging huge interest
rates.” Did this previously exacerbate
problems in those regions? “Without
question. MFIs offer a real alternative to
people, and the beneficial impact that
I have witnessed in those societies is
simply huge.”
“One of the goals of the MFI is to
recover its money, not to make a profit”,
says Bruckermann. Previously, the only
source of funding in such areas was
from moneylenders, who charged
interest rates of between 100 and
200%. Bruckermann explains “MFIs
charge a much more reasonable rate
of a little over 30%, which fully covers
all the costs of loan officers travelling
hundreds of miles across inhospitable
terrain to get to a local community.
Though such a rate might seem high to
Western minds, in these circumstances it
allows MFIs to survive”.
The relationship between Depfa and
Concern runs deep. Mr Bruckermann
explains that when he got to know more
about Concern “I could see that, as an
NGO, it was fairly non-political, and that
matched with the ethos of the bank.
Other NGOs stimulate political debate,
and very effectively too, but that is not
the stated goal of Concern”.
Social Responsibility
Depfa works with almost 6,000 local
authorities around the world, and its
board system is centred on the CEO. This
means that the bank can make decisions
quickly, certainly a key to its ongoing
success. And yet it is not well known in
Ireland.
Placed against the work with Concern,
the billions this bank handles and its
international state profile remains
seemingly incongruous. “Increasingly,
the expertise of Depfa as a state project-
funding bank can be brought to bear in
developing nations”, says Bruckermann.
“We are working with the World Bank
to see how we can help to manage
country funds. In projects like this,
we can see how our two seemingly
disconnected worlds merge: we have
expertise in helping governments to
fund and develop major infrastructure
initiatives, and in our work with
Concern in developing small initiatives
in developing nations. If we put these
two things together, we might be able to
help such nations at a macro, as well as a
micro level.”
Gerhard Bruckermann and Depfa do not
blow their own trumpet about their work
under the heading of social responsibility.
“From our work with Concern, we accrue
no benefits. However, for our people,
the work really functions at the level of
a motivational objective, but we’re not
trying to make any PR capital out of this.
We are extremely lucky, we are at a phase
in history where we could financially and
technically eradicate absolute poverty.
Of course governments have a genuine
responsibility, but personally we do too:
as corporations and individually. Our
generation has that responsibility
right now”.
“ I’m very interested
in ensuring the
correct balance of
regulation: too much
stifles growth, too
little creates a difficult
working environment”
PPPs in Ireland
The experience of Depfa in providing
public sector finance must also have
some relevance closer to home. “The
scope for Public Private Partnerships
(PPPs) in Ireland is huge,” says
Bruckermann, “because the high
growth rate of this economy is matched
by a lagging infrastructure. PPPs help
to speed things up hugely in sectors
like health, education and transport.
With careful consideration, there are
combinations of public and private
funding that can produce real results
for the nation”. In recent times, Ireland
has seen a very public debate on the
lasting value of PPPs, particularly with
the ongoing debate about the Westlink.
Bruckermann’s view? “A PPP gets an
initiative going that wouldn’t otherwise
be budgeted for. The private sector
needs some incentives to be involved.
Not every project ends up being as
lucrative as Dublin’s Westlink toll bridge
seems to have been. But there are
methodologies that help avoid such
controversies: for example, sharing
revenue when the project achieves more
than a specified return”.
The View from the IFSC
Continuing on the theme of success,
Bruckermann sees the role of the
IFSC as being central to the ongoing
socio-economic development of the
country. “Over the years, the IFSC
has developed into a vibrant business
district in its own right within the city
of Dublin through the conglomeration
of offices. It has attracted its own
ancillary legal and accounting practices
and has an important role to play
in the creation of cutting-edge
professional jobs.”
It is fair to say that most commentators
see that the ongoing development of
the IFSC must be continued in a wider
context. Bruckermann contributes to
this debate: “I’m happy overall with
governmental policy in the sector,
but I’m very interested in ensuring
the correct balance of regulation: too
much stifles growth, too little creates
a difficult working environment.”And
moving forward? “The elements that
will continue to drive the growth of
the IFSC include a general positive
political climate to support business
development, along with the creation
of an infrastructure that facilitates non-
nationals in areas such as schooling and
housing. Further, a fair and efficient
visa policy is necessary to attract top
professionals and add to the pool of
expertise in Ireland.” Finally, can the
IFSC stay ahead of the game, should
other economies attempt to replicate
its success? Bruckermann answers that
question with one word: “Flexibility”.
Microfinance
in Action
Two stories of how
microfinance has helped
change lives in Cambodia.
Ith Ya, 40, is widowed and trades
in stone goods in the Banteay
Meanchey province of Cambodia.
Her shop is located in her village,
but she also sells her items (including
sharpening stones, sculptures,
mortars and pestles, and rice mills)
in other areas. She began by selling
her goods from in front of her house
in 1999 when she received her first
loan from AMK Cambodia. Now she
has many clients, and hires between
10 and 20 skilled and unskilled
workers every day. It is a family
business: her son looks after the
workers, while she and her mother
take care of trading. In the future,
she would like to hire more workers
to meet demand.
Phuon Siek is 49 and married, and
raises livestock in Pursat, Cambodia.
He trained as a vet, and currently
owns 5 cows, 1 ox, 6 buffalo and a
pig. He started out by investing his
own savings with a loan from AMK
to buy three piglets. With the profit,
and a further loan, he bought a rice
field and two more piglets. With
his new profit, and a third loan,
he bought a cow. His fourth loan
bought him another piglet and some
fertilizer. In the future he intends
to rent his cows and buffalo to his
neighbours.
Adapted with the kind permission
of Concern.
ABOUT BANKING 15
 International Financial Services in Ireland:
The Next Phase of Development
Sean Dorgan, Chief Executive, IDA Ireland
Following years of tremendous growth and success, Ireland’s international financial
services industry now needs to move beyond transaction processing to focus more
on activities that are revenue and profit based, writes Sean Dorgan.
Since the formation of the IFSC in 1987, Ireland’s position
in the international financial services industry has
undergone a complete transformation, evolving from
an industry serving local market needs into one of the
world’s leading financial hubs. It has also contributed
to and mirrored Ireland’s economic development,
particularly over the last decade.
Dublin is now internationally recognised as a first choice
location for the international financial services industry,
ranging from banking and treasury to insurance and funds.
This is largely due to Ireland’s reputation for highly-skilled and
experienced people, our ‘can do’ business attitude, responsive
legislation and flexible, speedy regulatory procedures.
Identifying the challenges ahead
Notwithstanding the success achieved to date (see the side
panel on page 17), the industry in Ireland is constantly
facing new challenges. New competitors are emerging, both
from within the EU and worldwide, all eager to replicate
Ireland’s achievements. The world of financial services is
changing; there are new pressures on various sectors of
the industry. We must constantly evolve and build on our
strengths and develop new areas where Ireland can achieve
the lead position.
IDA Ireland has undertaken several new measures specific
to the international financial services area to ensure that
Ireland is prepared for the next phase of development in
the industry. IDA Ireland’s International Financial Services
team has been expanded and a renewed emphasis has
been placed on promoting the new potential business
in the industry. In order to examine potential areas of
16 ABOUT BANKING
opportunity, IDA Ireland commissioned international
consultants, Deloitte, to undertake a study to examine the
current position of the industry and to identify areas for
future development.
The findings of the Deloitte report, “The Future of the
International Services Sector in Ireland”, identified emerging
global trends in the industry and pointed to key areas of
opportunity where leadership could be achieved and key
competitive advantages could be developed in the future. Areas
highlighted in the report include:
• Specialist debt/financing products and securitisation
• Managing global/regional banking products
• Funds servicing
• Asset Management
• Pan European mass risk/retail insurance products
Meeting these challenges
The industry in Ireland is now at a crossroads. The majority of
the activity, and therefore the employment, is centred around
transaction processing. This needs to change if international
financial services are to remain and develop in line with
Ireland’s ongoing economic growth.
Ireland needs to move from this phase of transaction
processing to one which is revenue generating and profit
motivated. A number of companies have already made this
transition - for example, Merrill Lynch and KBC - and there
are others whose activities were and are revenue and profit
based. This basis of operation is not new to Ireland and the
majority of multinational companies who operate here across
other sectors such as life sciences, ICT, and engineering are
focused on revenue and profits.
In line with this step change in the activity base IDA proposes
that Ireland’s international financial services companies should
become actually involved in creating knowledge within their
companies. Such knowledge will lead to creativity, innovation
and product development. It will help companies to win
corporate mandates, deepen relationships with the customer
and increase sales and marketing activity. A good example is
Citigroup, who recently announced the establishment of a
Research and Development (R&D) Centre of Excellence at its
Dublin offices in the IFSC. This is the first dedicated R&D Centre
established by Citigroup worldwide and the first ever R&D
investment by a financial services company in Ireland.
The infrastructure required for this transition is fundamentally
in place. However, step changes always require refinements and
the international financial services sector is no different.
As recommended by Deloitte, the education inputs could be
enhanced by creating a “chair of financial services”, increasing
the number and scope of academic courses in the areas of risk
management and computational finance together with more
collaboration with internationally recognised schools. In this
regard, the recent development and launch by the Irish Bankers
Federation (IBF) and The Institute of Bankers in Ireland of the
Executive Masters Degree in Risk Management is particularly
welcome. Now underway in University College Dublin, this MSc
course should help meet the need for more well-qualified risk
management professionals.
It is important that Ireland’s taxation environment is “capital
friendly” and that there is an ongoing development of our
extensive double taxation agreements. Equally, it will be
important to ensure sufficient regulatory measures are available
to support the Financial Regulator’s stated role of facilitating
innovation, competitiveness and growth in the sector through
effective and responsive regulation.
A key factor in the success and growth of the IFSC has
been the team effort that has gone into achieving this. The
partnerships that have formed over the years between the
various government departments and agencies, the industry
itself and the supporting professional services have been key to
the success story. It is crucial that this cooperation continues as
we move into the next phase of development for the industry.
The industry in Ireland is reinventing itself at accelerating rates
and we must work to ensure that Ireland keeps pace with these
changes in order to maintain our position as a world leading
location for the industry at the forefront of developments.
IDA Ireland will continue to work with companies and
representative bodies, such as IBF, to ensure that Ireland offers
the most attractive package to the industry in terms of business
knowledge, skills and responsive legislation. However, we face
the challenges with confidence that Ireland can continue to
meet the needs of the international financial services industry
based on our ongoing success and the responsiveness Ireland
has displayed since 1987.
Making Ireland
a Global Player
The listing of IFSC companies reads like a “who’s
who” of top global financial institutions with
companies such as Citigroup, State Street, Depfa
Bank, JP Morgan, HSBC, Merrill Lynch, XL, Hartford
and ABN AMRO managing European and global
functions from the IFSC. Dublin is now home to
half of the world’s top fifty banks and one of the
main European locations for insurance (both life and
general) and an internationally recognised hub for
the funds industry. Up to 16,000 professionals work
directly in the industry today, with as many again
employed indirectly in support services (legal, tax,
accounting etc.)
Some highlights, which give an idea of the scale of
operations in the IFSC, are:
• Bank assets of international banks are now worth over
€337 billion;
• Net asset values of domiciled investment funds are
€498 billion;
• Cross-border life assurance premiums are €5.6 billion;
• Some €700 million paid by IFSC companies
in corporation tax to the exchequer in 2002, which
accounted for 15% of the total take for the year.
The success of the IFSC has led to the growth of non-
regulated financial services activities, expanding into
locations nationwide. A key element of IDA’s strategy is
to continue to encourage and support the development
of financial services activities beyond the greater
Dublin area, ensuring Ireland and not the IFSC alone is
internationally recognised as a first-class location for the
industry. A growing number of companies are already
doing this by adding operations centres and back office
and administrative activities, with strong clusters of
these activities being developed in several regional areas
across Ireland.
The year 2005 alone has seen companies such as
IFS and Bisys expand with new regional operations
in Drogheda, Naas and Waterford, while PFPC has
built on its positive experiences in Wexford and
is expanding its existing facility and opening a
new office in Navan. Other companies that have
found success outside the IFSC include Sun Life
in Waterford, State Street in Kilkenny, GMAC in
Mullingar, MBNA in Carrick-on-Shannon, Cigna in
Galway and Pramerica and Pacificare in Letterkenny.
ABOUT BANKING 17
 The Role of Pricing in Retail Banking
in Ireland
Brian Gannon, Head of Financial Services UK and Ireland

also because the charges for services

Brian Gannon believes have not been as transparent as they
that, with little scope might be from country to country.
left to compete Although banks generally publicise
charges for their core products, it is
on price for basic difficult to compare the cost of the basic
services, retail banks services across national boundaries,
since not all services and products are
in Ireland need to directly comparable.
intensify the drive for
The Capgemini World Retail Banking
service improvement Report sheds some light on this. Its goal
with technology and is to provide people in financial services
around the world with a clearer view of
innovation as the dynamics of today’s retail banking
key drivers. industry. The report presents an annual
index of prices of banking services across
It is only in recent years that consumers national markets. However, because of
have become more aware of the costs the difficulty in direct comparison, the
associated with the financial products pricing indices are restricted to day-to-
and services they buy. This is partly day banking products and services, and
because the levels of financial literacy do not represent an all-encompassing
among the public at large are low, but benchmark of retail banking prices.

Figure 1: Annual weighted prices of core banking services by country using

global usage profile, 2005 (€)

300

252
250
Annual weighted prices 2005 €

223

200

159
150 131 126
108 105
101 2005 Average €108
99 99 93 93
100 83 81 80
64 63 59 54
50 34

0
Ireland
Germany

Switzerland

Belgium
Spain

China
Norway

Czech Republic

Australia

UK

Netherlands
France

Sweden
Poland

Austria
Canada
Slovakia

Portugal
US
Italy

Source: Capgemini Analysis 2005, World Retail Banking Report 2005

18 ABOUT BANKING
 “...as Figure 1 shows, Ireland fared extremely well in its pricing,
coming in as the third lowest pricing regime out of all
the 20 countries surveyed.”
Earlier this year, the Irish Bankers
Federation commissioned Capgemini to
include Ireland in its international survey,
measuring the same services in the same
way as it did for other countries. The
original research, which covered 130
banks in 15 European states, the US,
Canada, China and Australia concluded
that the average cost of basic banking
services was €108 annually, ranging
from a low of €34 to a high of €252.
This wide range shows how independent
each country is when it comes to
setting basic prices, although the report
notes that usage and customs vary
substantially between countries.
Cost of banking well below
global average
So how did Ireland measure up?
In fact, as Figure 1 shows, Ireland fared
extremely well in its pricing, coming in
as the third lowest pricing regime out
of all the 20 countries surveyed. Only
the Netherlands and China provide
basic services at lower prices. Ireland’s
cost of banking is €59, against the
average of €108 across all of the
countries surveyed. However, a number
of anomalies are noteworthy: the
Irish government charges stamp duty
for cheques, and this is not standard
practice in other countries. Also, an
annual government duty applies to
ATM, debit and credit cards (again not
standard practice elsewhere) and these
were excluded from the analysis.
As Figure 2 shows (p.20), the cost of
banking services in Ireland is also low
on a GDP per capita basis compared
to other mature markets. At 0.13%
of GDP, Ireland’s cost is half that of
the UK and only the Netherlands
and Sweden among the 20 countries
surveyed are comparable.
Some other conclusions are worthy of
note. Banks in Ireland have adopted
a mix of pricing strategies, with
transactional-based pricing on payment
and cash utilisation products, like cheque
books, debit card cash deposits at desk
and withdrawals at banks’ ATMs. The
report noted that there is little variation
in usage patterns between those Irish
banks which charge for both ATM
withdrawals at their bank and others,
and those which do not charge at all.
And in Ireland, as elsewhere, banks are
using pricing to persuade consumers to
use certain products and services and
not use others.
Where can Irish banks compete?
If the pricing for core banking services
in Ireland is comparatively low, what
scope does this give the banks to
compete? The Capgemini report poses
this question differently but raises the
same issue: how can retail banks in
mature banking markets increase their
share of wallet from high-potential,
mass-affluent customers? Based on
interviews with banking executives
across the survey locations, Capgemini
found that most institutions are
attempting to establish or refresh
a relationship approach with their
clients. Their objective is to meet
customers’ needs more effectively and
increase the perceived value of the
banks’ services and retail solutions.
However, the report found that very
few financial institutions have set up
a fully structured approach to client
relationships, or attempted to align the
critical elements required to produce
results, such as understanding and
segmenting customers, product and
service offerings, organisation,
structure, IT and tools, and
performance management.
Another recent report, ‘Powerful Pricing
Processes’, by Georg Wuebker and Jens
Baumgarten of Simon-Kucher & Partners,
also looks at this issue. The report notes:
“After rounds of heavy cost cutting,
companies have nearly exhausted the
potential to reduce costs any further.
Now management must concentrate
more on revenue and price.” This mirrors
a Capgemini conclusion from its study
in Ireland: that banks do not have much
scope left in competing on price for
basic services. If this is so, banks need to
compete in other areas - most notably
in intensifying the drive for service
improvement. Wuebker and Baumgarten
conclude that management should
concentrate more on ‘intelligent’ price
increases than on other measures such as
cost cutting, especially in situations with
low unit margins.
The key to success for banks, say the
authors, is to apply innovative price
strategies that focus on the customer’s
needs and implement these strategies
using an effective pricing process.
In Ireland, as in many other countries
surveyed in the Capgemini report,
the financial services sector is
regulated - although regulation of
prices per se is unique to Ireland.
While there is increasing clarity (and
some concern) about the increasingly
onerous regulatory burden borne by
financial services institutions, there is
less discussion about the role of the
regulator in pricing of basic services.
ABOUT BANKING 19
The Role of Pricing in Retail Banking in Ireland

Figure 2: Local profile prices of core banking services versus GDP per inhabitant (%)

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
Portugal

Australia

Spain

Ireland
Czech Republic
Poland
China

Switzerland

Austria

Belgium

Sweden
Germany

UK
France

Canada

Norway
Slovakia

US

Netherlands
Italy

Source: Capgemini Analysis 2005, World Retail Banking Report 2005

In the UK, for example, the Financial cost of processing, and have passed UK, financial institutions have been
Services Authority champions consumer a proportion of these cost savings to accused of earning excessive profits.
rights, but does not see itself as a customers. Capgemini research shows The Economist noted that, last year,
regulator of competition, leaving that that the average number of cheques Britain’s four biggest banks between
to the Office of Fair Trading. In Ireland written by a person in the Netherlands them made £6.7 billion profit from
it is difficult to assess the impact of is two per annum, which compares their retail banking operations in
price controls on competition. Who to almost 48 in Ireland. Many of the Britain - a profit of about £126 per
could say whether the abolition of processes associated with basic banking customer. It asked whether this points
price controls and introduction of freer services are heavily automated in the to a market inefficiency - in other
market forces would help consumers Netherlands, and this reduces the cost of words, is there some reason why
get a better deal - although the launch providing these services. competitors have failed to provide
of various free account offerings shows cheaper services? Que Choisir, the
that banks are prepared to be very There is certainly scope in Ireland and French equivalent of Britain’s consumer
innovative in pricing when it comes to the UK to follow this technological lead. magazine, Which?, calculated that
acquiring customers. Most of the major banks have initiatives French banks charge a margin of
in place to automate front and back between 35% and 100% above the
office processes - and many are well costs of technical banking services
The role of technology advanced in implementing technology- such as payments by cheque. Even
and innovation enabled services to their customers. then, as our World Retail Banking
One further important question arises Other EU-sponsored initiatives, like the Report shows, a number of countries
from the Capgemini study: why is Single European Payments Area, will leave France and the UK well behind
pricing in the Netherlands the lowest lead to further investment in technology when it comes to charging for core
of all the countries surveyed, and in the coming years, speeding up an banking services. Whatever grounds
significantly lower than the average inevitable process. for complaint bank customers in
price of core services? The answer Ireland may have, they cannot point
is that Dutch banks have invested A final point relates to banks’ the finger at excessive charging for
heavily in technology to reduce the profitability. Both in Ireland and in the such services.

20 ABOUT BANKING
 How you can help
families fight poverty
With Concern’s help, Khamla has
become self sufficient and can
now grow enough rice to feed his
family for the entire year.

Concern works with poor communities the lives of people like Khamla by
so they can protect themselves from making a gift today and returning it
the uncertainties of the future – by to our Freepost address with the
helping build the resources people form below.
need to make their lives more secure.
Fighting poverty through
In Ethiopia, we are helping families
buy new stoves to bake and sell bread.
improving livelihoods.
These stoves will continue providing With Concern’s help, Khamla
families with a secure source of and his family have enough
income for many years to come. food for the year and to save
In Laos, our ‘Farmer Fields Group’ for planting next year.
teaches local people new techniques
to increase their rice production and • €30 could help buy 100 kilos
how to make natural remedies which of seed in Ethiopia.
kill off pests. As a result, families can • €100 could help towards a
gain extra income by selling surplus 'Farmer Fields Group' to help
rice seed. local people increase agricultural
Please help us provide the long-term production in Laos.
support that makes a real difference to Khamla, Photo by: Justin White, Laos 2003

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 Securing the Future
of Covered Bonds
Paul O’Connor, Head of Prudential Supervision and Risk, Irish Bankers Federation
The interests of Ireland, and a competitive
European Union market, are well served in
new measures adopted at EU level for the
rapidly-developing covered bonds sector,
writes Paul O’Connor.
Rapidly-developing with huge
potential for further growth, the
covered bonds market is now the
second largest bonds market in
Europe, after government bonds.
New legislation and continuous
product innovation have established
covered bonds as the most
important segment of privately-
issued bonds on Europe’s capital
markets. With some 23 European
countries active in this market,
the volume of covered bonds
outstanding exceeded €1.6 trillion
by the end of 2004.
Ireland enacted legislation enabling the
issuance of covered bonds in 2001 and
the first issues took place the following
year. By 2004, Ireland represented
almost 5% of the total outstanding
balances of the larger covered bonds,
called jumbo covered bonds, and
accounted for over 12% of new issues
of jumbo covered bonds during that
year. Banks such as Depfa Bank and
WestLB are highly active in the public
loan covered bond arena through their
Irish operations whereas Bank of Ireland
22 ABOUT BANKING
is active in the area of mortgage credit
covered bonds.
Covered bonds secured with mortgage
credit are a major source of funding
for the European mortgage market,
which stood at €4.7 trillion at the end
of 2004. There is likely to be further
significant growth in all areas of the
covered bond market over the coming
years, driven in part by the continued
expansion of the mortgage market.
Already, the mortgage market has
expanded at an average annual rate of
over 8% for each of the past ten years,
with 9.7% recorded in 2004. In the
enlarged European Union of 25 Member
States, the fastest growing national
markets are the Central and Eastern
European countries. Ireland, Spain and
Greece are the fastest growing markets
amongst the EU15.
European mortgage debt amounts to
45% of EU GDP compared with a US
figure of 65%. While the two markets
are not directly comparable, there remains
significant room for growth in Europe.
Gay Mitchell, TD, MEP, tabled a number of amendments to secure a favourable outcome.
Addressing shortcomings in
EU legislation
The European Commission’s Capital
Requirements Directive (CRD) defines the
rules for capital adequacy of banks for
the next generation of banking. This is
the level of capital required by institutions
to ensure that they maintain the
appropriate level of capital to reflect the
risk profile of their assets. This is essential
to protect banks from insolvency and to
protect their customers’ interests.
With regard to covered bonds, the CRD
defines the minimum regulatory capital
requirements for covered bonds and
specifies a range of eligibility criteria
which must be fulfilled if the bond is to
receive capital treatment as a covered
bond. A covered bond meeting the
criteria laid out in the CRD can achieve a
lower risk weighting of 10%.
The original proposal by the Commission
contained a number of restrictive
measures which would have seriously
reduced the ability of Ireland and other
EU countries to compete with the
traditional providers of covered bonds
– Germany, Austria and Denmark. Given
that all covered bonds issued in Ireland
have achieved an AAA rating from the
major rating agencies and that there is
no history of default in the EU covered
bond market, these restrictions appeared
unnecessary and regressive.
The proposal contained three major
restrictions as follows:
• less ability to incorporate a broad range
of international (non-EU) assets in a
pool, favouring markets which have a
large availability of domestic assets;
• lower limits applying to the
substitution of assets within a pool,
thereby reducing operational flexibility.
Assets need to be replaced from time
to time as the loans are repaid. This
favoured markets where long-term,
fixed rates are the norm and loans
are generally not switched from one
lender to another;
• stricter rules on the valuation levels
applying to residential mortgages
whereby only loans of a lower
loan-to-value (LTV) level could be
included in the pool of assets. For any
marketplace with a rapidly growing
property market - such as Ireland, UK,
Spain and the Netherlands - higher
LTVs are commonplace.
The EU legislative process requires
consideration by the European Council
- representing the relevant government
ministries of the 25 Member States - and
parallel consideration by the European
Parliament and its elected members. A
negotiated agreement is ultimately put
to a final vote in a full plenary session
of Parliament. The Commission remains
influential throughout the process,
attending all meetings of Council.
Promoting Ireland’s interests
To influence the European agenda, it is
important to have a European position.
In Ireland a national position was
developed through dialogue between
the industry, the Department of Finance
© Photo European Parliament
and the Financial Regulator. This was
taken forward at a European level
through the various industry associations.
These included the European Banking
Federation representing 29 countries
and over 4,000 banks, the European
Mortgage Federation representing
over 75% of the EU mortgage lending
industry and the European Covered Bond
Council (ECBC).
Considerable differences of opinion
existed amongst Member States, ranging
from the extremely conservative through
progressive to wildly ambitious. At each
of the industry fora, the Irish position
was presented and a European position
negotiated which accommodated the
views of various Member States, and
importantly for us, accommodated the
Irish national interest. This established
a clear and unified European position
which was then taken to the Commission,
Council and Parliament.
The outcome ultimately proved positive,
persuading the Commission and the
Council that the restrictive measures were
unnecessary. The Council agreement
negotiated under the Luxembourg
Presidency at the end of June 2005
represented a good outcome.
The consideration by Parliament proved
to be equally challenging, as new
proposals surfaced including one to
remove the full eligibility of EU assets.
EU Member States are governed by
common treaty and rules on financial
stability and it is accepted that EU assets
carry less risk than non-EU assets.
ABOUT BANKING 23
Securing the Future of Covered Bonds
Eoin Ryan, TD, MEP helped restore key measures required by Ireland.
Further restrictions to international asset
eligibility were proposed along with other
measures that would have impacted
negatively on the ability of Ireland and
others to compete successfully in the
European marketplace.
Within the European Parliament, both
Gay Mitchell TD, MEP and Eoin Ryan TD,
MEP used their positions as members of
the European Committee on Economic
Affairs (ECON) to alter the course of the
debate and restore the key measures
required by Ireland, Luxembourg,
France, UK and others. Gay Mitchell led
the campaign within the EPP political
grouping, the largest in Parliament, to
win the support of members for the Irish
position. The debate ultimately went to
the day of the final ECON committee vote
in July with an oral amendment tabled
during the vote by Gay Mitchell to secure
the eligibility of international assets.
“By 2004, Ireland
represented almost
5% of the total
outstanding balances
of the larger covered
bonds…and accounted
for over 12% of
new issues…”
The outcome was the adoption by
Parliament of the more progressive
approach that had been widely favoured.
24 ABOUT BANKING
This incorporated measures that will
benefit all European jurisdictions and
represents a highly successful outcome.
The final round lay in the closing
negotiations between Council and
Parliament, which focused on the correct
level of the Loss Given Default (LGD)
parameter to be applied to covered
bonds. While highly technical, this
was very important to the traditional
and larger players in the marketplace,
especially Germany. Other Member States
were keen to ensure that a level playing
field would prevail and a compromise
was reached in the lowering of LGD from
12.5% to 11.25% for all AAA-rated
covered bonds.
While much has been achieved at the
European level, Ireland cannot afford to
stand still. In the past year, there have
been many legislative developments
in various Member States - Germany
and Italy introduced new legislation
while Portugal is currently reviewing its
legislation. The challenge to the Irish
industry and authorities is to maintain
a competitive level of legislation while
preserving the quality of the covered
bond product.
As Chairman of the European Covered
Bond Council’s CRD group, Paul
O’Connor has been at the centre of
representations at EU level on the
covered bonds issue.
© Photo European Parliament
What is a covered bond?
A covered bond is a bond issued by
a bank secured by a pool of high
quality assets on the balance sheet
of the issuer. These assets may be
mortgage loans, both residential and
commercial, or alternatively public
sector loans.
Public sector covered bonds account
for over 55% of the total amount of
covered bonds in issue.
Benefits of covered bonds
Covered bonds are a low-risk
product and are of major interest to
international investors. Key benefits
for both issuers and investors
include the following.
For issuers
• Lower funding costs
• Flexible alternative to deposits and
senior bonds
• Possibility of extending the
maturity profile of banks’ liability
side to make it match with
mortgage loans maturity
• Generally better returns on
regulatory capital
For investors
• Alternative to government bonds
• Secure instrument in case of
issuer insolvency
• High liquidity due to large
issue sizes and market maker
commitments in the jumbo market
• Geographic and asset class
diversification
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