EDITION 5 JUNE 2007

The Role of the

Banking Sector
A Central Bank View
INSIDE

Ireland Debt Enforcement Ireland’s Asset Covered

Banking on Future The Case Securities Regime
Competitiveness for Reform
2 ABOUT BANKING

5802 - About Banking 5.indd 2 07/06/2007 17:27:54

5802 - About Banking 5.indd 3 07/06/2007 17:27:57
 CONTENTS

2-4 Newsdesk
The latest news from the
Irish financial services sector
ABOUT BANKING
ISSN 1649-6671

About Banking is a publication

of the Irish Banking Federation
6-7 Debt Enforcement: The Case for Reform (IBF). Opinions expressed in the
magazine are not necessarily those
Paul Joyce
of IBF, its Council, Committees
or the Editor. Reproduction in
whole or in part without written
permission is strictly prohibited.

The Irish Banking Federation is the

leading representative body for
8-10 The Role of the Banking Sector: the banking and financial services
A Central Bank View sector in Ireland. Membership
of over 60 institutions includes
John Hurley licensed domestic and foreign
banks and financial services
institutions operating here.
Federation of International Banks
in Ireland (FIBI) and the
Irish Mortgage Council (IMC)
12-15 Ireland: Banking on Future Competitiveness are affiliates.
Dr. Don Thornhill
President: Richie Boucher
Chief Executive: Pat Farrell

Irish Banking Federation,

Nassau House,
Nassau Street,
Dublin 2
17-18 Persistence Beats Resistance
Tel: +353 (0)1 6715311
Gerry McCaughey Email: ibf@ibf.ie
www.ibf.ie

Editor
Felix O’Regan
felix.oregan@ibf.ie

20-21 Ireland’s Asset Covered Securities Regime Production

Anthony O’Brien
Paul O’Connor anthony.obrien@ibf.ie

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Lisa Shevlin
lisa.shevlin@ibf.ie

Design
22-23 Institutional Investment in the Dcoy Design
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Private Rented Housing Sectorr
Professor Tony Crook Printing
Hudson Killeen

24 Promoting Professional Skills in

Financial Services
The Institute of Bankers in Ireland

5802 - About Banking 5.indd inside:1 07/06/2007 17:27:59

 NEWSDESK
IBF Chief Executive Pat Farrell and Michael McLoughlin,
Managing Director, Amárach Consulting, at the launch of the IBF
Personal Asset Profile
Irish save well but need better
financial planning
Recent research, the IBF Personal Asset Profile, which was
undertaken by Amárach and published by the Irish Banking
Federation (IBF), shows that nine out of ten consumers are
saving/investing - with two-thirds of them doing so on a
regular basis. However, the research also shows that one in
three consumers do not know how their current investments
have performed over the past year; and far too little attention
is given to financial planning for the future.
Based on in-depth interviews with 800 adults throughout
Ireland during February-March 2007 the first IBF Personal
Asset Profile also found that 68% plan regular saving over
the next three years, while 32% plan to invest.
However, few plan for the future either through securing
an income for retirement or by making a will. Some 26%
of consumers have nothing in place as a potential source
of retirement income; and 80% have never made an AVC.
Similarly, 54% have not made a will and over two-thirds
don’t intend to in the next year.
IBF plans to repeat this research on a regular basis.
2 ABOUT BANKING
5802 - About Banking 5.indd inside:2
Pictured at the 2006 BSTAI Student Achievement Awards:
Caroline McHale, President, BSTAI, Minister for Education and
Science, Mary Hanafin T.D. and IBF President, Richie Boucher.
IBF and BSTAI honour student
excellence
IBF hosted the Business Studies Teachers’ Association of
Ireland (BSTAI) Student Achievement Awards ceremony.
This annual event honours students who attain first place
in business studies subjects in the State examinations
(Accounting, Economics and Business at Leaving Certificate
Level and Business Studies at Junior Certificate Level) in 2006.
Presenting the awards at the National Concert Hall in
Dublin, Minister for Education and Science, Mary Hanafin
T.D., praised the recipients’ “remarkable achievement”. IBF
President, Richie Boucher highlighted IBF’s “strong links with
the education sector through the education programmes
we have developed in the past for use in both primary and
post-primary schools. These Student Achievement Awards are
but one of a number of initiatives in which we are involved to
help promote business and financial knowledge and literacy
in our schools.”
07/06/2007 17:28:07
 Banks’ SFF funding to boost
community development
The first funds from the new Social Finance Foundation
(SFF) are expected to be allocated over the coming months.
Launched in February by the Minister for Finance, Brian
Cowen T.D., with seed funding of €25 million from
the banking sector, the SFF operates as a not-for-profit
wholesale supplier of social finance for on-lending to
support social and developmental projects and social
enterprise in local communities across the country.
Stressing the significance of banking sector support for the
initiative, IBF President, Richie Boucher, advised that the
seed funding would be instrumental in helping to promote
social inclusion through new programmes of community
investment and enterprise. The Minister for Finance further
sees the initiative “as a catalyst for deeper participation
by private finance in the area of local and community
development and social enterprise”.
Speaking at the launch of the Social Finance Foundation, the newly-
appointed Chairman, Peter Quinn, expressed confidence that the SFF will
have a lasting, positive impact in local communities.
Minister for Finance, Brian Cowen T.D. and FIBI Chairman, Michael Deeny.
5802 - About Banking 5.indd inside:3
Cutting down on litter: Minister Dick Roche, T.D. and IBF Chief Executive
Pat Farrell.
New anti-litter protocol
The Minister for the Environment, Heritage and Local
Government and IBF, on behalf of the retail banking
groups with ATM networks, announced earlier this year
a new Protocol to reduce litter relating to ATM advice
slips. The Protocol contains three agreed measures:
ATM cash withdrawal slips on request only; enhanced
customer awareness of a cleaner environment through
ATM-screen messaging; and procedures for litter
management and monitoring around ATMs.
“This agreement is a balanced and innovative response
to this particular litter problem and is a good example of
industry and government working together to address a
problem and come up with an effective solution,” said
Minister Dick Roche T.D.
IBF Chief Executive, Pat Farrell, stated that the banking
sector was “very pleased to assist in bringing about a
cleaner environment. Both banks and their customers
need to play their part in being more conscious of the
need to protect our environment, and I am confident
that the new Protocol will achieve this.”
Public-private partnership key
to success
Speaking at the recent Federation of International Banks
in Ireland’s annual lunch, FIBI Chairman, Michael Deeny,
welcomed the government’s Building on Success strategy
for the future development of the sector and said it
“identifies a wide range of commitments that will be
crucial to the future success of the sector. It is important
that both the public sector and industry devote the
necessary time and resources to delivering on those
commitments. FIBI has an integral role to play in this.”
ABOUT BANKING 3
07/06/2007 17:28:10
 Telling our story
In recent weeks we held one of our major annual events,
the Federation of International Banks in Ireland (FIBI) Annual
Lunch. As always, it drew a capacity attendance, with high-level
representation from all of our major stakeholders. Our guest
speaker was the Minister for Finance, Brian Cowen T.D.
By way of introduction, the FIBI Chairman, Michael Deeny,
charted the success of the sector over a 20-year period since the
International Financial Services Centre (IFSC) was established.
Central to his theme was the number of high-quality, well-paid
jobs created by the sector, the amount of taxes paid and the
overall wealth generated for Ireland and its citizens.
In the days after the event one of our guests, an influential and
highly-respected policy maker, remarked to me how struck he
was by this remarkable success story; and he revealed his own
desire to learn more about the sector’s plans and ambitions for
further growth. I was left with the clear impression that all of
us who work for and within the sector need to redouble our
efforts to convey to key influencers and opinion formers how
critically important our sector’s development will be to wider
society – that is, if we are to sustain the gains achieved during
the so-called “Celtic Tiger” era.
Events of recent weeks have convinced me that, while
challenging, the task can be met provided we all play our part.
Just to convey a sense of the challenge: in a period dominated
by electioneering and the inevitable policy manifestoes, and
as we now await the installation of a new government, we
can only hope that the priorities of our political representatives
will achieve equilibrium between the spending
of wealth and the commensurate need to create
wealth. Manifesto references to plans and
proposals to grow our sector have been few and
far between. By contrast, and without providing
any evidence-based, public need, these same
manifestoes have been liberally sprinkled with
Pat Farrell,
IBF Chief Executive
New IBF website
I am pleased to introduce our new website. The project
was lead by IBF’s own team and our partners, Durrow
Communications, who designed the new-look www.ibf.ie.
In embarking on this redesign, our objectives were to:
• improve the provision of information to our various
stakeholders – including new, specific areas for ‘consumers
and community’, ‘for schools’ as well as ‘for members’
• communicate more effectively the function and activities of
the IBF
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5802 - About Banking 5.indd inside:4
populist proposals which, if implemented, would tie up the
sector in additional, unnecessary regulation and costs.
The very existence of such proposals sends a clear signal to us
all that we must take every opportunity to reinforce the value
that our sector creates on a daily basis:
• accounting for one in every fifteen jobs in the “for profit
sector” in Ireland
• consistently outpacing many other sectors in our ability to
create sustainable, well-paid, highly-skilled jobs
• generating close on 80,000 jobs both directly and indirectly
• among the leading employers in locations such as Cork,
Wexford, Kilkenny, Leitrim, Roscommon, Waterford, Kildare,
Kilkenny, Louth, Limerick, Meath and Westmeath in addition
to the IFSC
• competitive in all key retail markets and open to
new entrants
• strongly committed to innovation and investment in
supporting infrastructure, so as to fully meet the product
and service needs of our dynamic and strongly-expanding
economy.
So, we can view with satisfaction what has been achieved; a
sector that is delivering on all the key dimensions – service, jobs,
wealth creation, efficiency and competition.
However, it is clear that we have a lot more work to do to get
this message across to our politicians and to policy makers.
We all have a responsibility to make our voices heard. Over the
coming months why not take each and every opportunity to tell
the success story of the sector,and its great potential
for further growth to politicians, policy makers and
influencers alike. If you don’t do it, don’t assume
that someone else will!
• make content more user friendly and accessible.
The design was informed by member feedback and, so far,
comments have been very positive. We will continue to
develop content and accessibility, ensuring that we maintain
our position as the premier online information source for the
banking and financial services industry.
07/06/2007 17:28:12
 KILIMANJARO TREK
February 2 0 0 8

Support the work of Bóthar and see the sights of amazing Arusha on a
combined 12-day Study Tour and Fundraising Challenge.

A unique opportunity to visit Bóthar’s dairy goat projects

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To sign up please contact Bóthar’s Study Tour office on
071 9120100 or email events@bothar.ie

5802 - About Banking 5.indd inside:5 07/06/2007 17:28:15

 Debt Enforcement: The Case for Reform
Paul Joyce, Senior Policy Researcher, Free Legal Advice Centres (FLAC)
With both debtor and creditor advocates agreeing on the need for reform of our
debt enforcement system, why have successive governments not taken action?
asks Paul Joyce.
It is now four years since Free Legal Advice Centres (FLAC)
published its report, An End Based on Means, calling for a root
and branch review of the debt enforcement system in Ireland
and proposing an agenda for reform. It is seven years since
the Irish Banking Federation (IBF) supported a submission on
issues by West and North West Money Advice and Budgeting
Service (MABS) to the Minister for Justice, Equality and Law
Reform. And it is to 10 years since IBF itself sent a submission
to the same Minister calling for a less complex bankruptcy
procedure, a quasi-judicial system for dealing with debt and the
introduction of attachment of earnings.
What these submissions have in common is that they each
identify the necessity for change, albeit from different
perspectives: MABS and FLAC are concerned principally with
the debtors’ position, IBF principally with that of creditors.
Nevertheless, these parties have been able to negotiate and
successfully implement a Debt Settlement Pilot Scheme (see
below) – clearly demonstrating that differing interests can be
reconciled to their mutual benefit.
Despite these and other submissions, the Department of Justice,
Equality and Law Reform has taken no action during this period
to modernise the outdated debt enforcement infrastructure
in our legal system. Whilst our average debt to income ratio
has soared, the State has looked on and admired the view.
At the same time, MABS has continued to develop and is
now generally seen to be a respected negotiator on behalf of
indebted people. However, it is a service that faces increasing
demands with finite resources and which has yet to be put
on a statutory footing despite repeated commitments by the
government to do so.
The current situation is not working
According to the Governor of the Central Bank, John Hurley,
it seems the hoped-for soft landing has arrived, with the
European Central Bank’s seven interest rate hikes since late
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5802 - About Banking 5.indd inside:6
2005 helping to cool Ireland’s property boom.1 Nonetheless,
based on the experience of MABS money advisers, there
are a lot of people who currently lack the capacity to meet
their credit commitments according to the scheduled terms.
Multiple debts that are intractable are now more common, the
Debt Settlement Pilot Scheme
The Debt Settlement Pilot Scheme was a joint initiative
between IBF and MABS (together with FLAC) which
operated between 2002 and 2005. The Pilot Scheme
provided for an alternative, non-judicial means of
resolving cases of multiple consumer debt that were
likely to prove intractable and otherwise end up in court
(and possible imprisonment for the debtor). As a real
alternative to legal action, all efforts were focused on
negotiations between the MABS money adviser (on
behalf of the debtor) and the various creditors involved
in order to identify a repayment programme – affordable
for the debtor and acceptable to creditors.
Where a debtor was admitted to the Pilot Scheme, s/he
was entitled, out of net income, to pay housing costs
and retain a minimum amount necessary to live, with
some latitude for extra expenses. In turn, s/he agreed to
dedicate her/his residual income to repaying debts on
a pro rata basis to all creditors over a defined period of
time (varying according to the circumstances) with the
prospect of a write-off of residual unsecured debt at the
conclusion of the repayment period. The Pilot Scheme
was modelled on more progressive consumer bankruptcy
laws in operation across Europe. Over 30 personal debt
cases were admitted to the Scheme and the vast majority
of these are still completing or have completed the
programme successfully.
07/06/2007 17:28:15
 amounts owed generally greater. Some debtors may simply be
carrying more credit than they can actually afford – however
this may have come about. Some are paying very high interest
rates on personal or housing loans to subprime lenders and
moneylenders. Others have fallen victim to the life events that
often trigger a debt crisis, such as illness, unemployment, small
business failure or family-related events.
In the absence of agreements on phased repayments being
reached between debtors and creditors - or their representatives
such as through a money adviser - the same tired and largely
ineffective options remain for creditors. In summary, these are
to obtain a judgment in the appropriate court and follow it up
with one or a combination of the following:
• register a judgment mortgage against property owned by
the debtor;
• get the Sheriff to seize goods belonging to the debtor in
order to execute the order;
• register the judgment to potentially affect the debtor’s
credit rating;
• file for the debtor’s bankruptcy in the High Court;
• examine the debtor’s means to obtain an instalment order.
In relation to this last option, almost 1,000 people served
terms of imprisonment from January 2002 to September 2006
for ‘offences relating to debt’. Although there is no further
breakdown of these figures, a large number result from a failure
to meet the terms of an instalment order made by a District
Court judge to repay civil debt judgments by instalment. This is
completely unacceptable from a human rights perspective.
In terms of profile, the statistics again do not provide further
detail of which types of creditors are behind these proceedings,
although anecdotally some are far less vociferous than others.
For example, acting on behalf of banks and building societies,
IBF is on record as calling for an alternative to imprisonment as
a means of dealing with debt problems.
A better way to debt enforcement
FLAC is currently finalising a new report that considers the
effectiveness of the instalment order procedure. This is based
on a series of in-depth interviews with a number of MABS
clients who have been brought through this process. Briefly, the
procedure may involve the following steps;
(i) A judgment is obtained without a defence being offered by
the debtor
(ii) The debtor’s means are examined at a court hearing
(iii) An instalment order is served on the debtor
(iv) If the debtor defaults on repayments under the instalment
order, a summons is issued to the debtor to attend a court
hearing to explain default or face arrest and imprisonment
(v) If the debtor fails to comply, a committal order is issued and
a warrant to execute it is sent to the Gardaí
(vi) The debtor serves time in prison.
Without wishing to prejudice the report’s findings, which will
be published in the coming months, it is apparent that the
appearance rate of interviewees at the various stages of this
procedure was very low. The fact that these hearings take place
in public in open court is a major deterrent for debtors, many
of whom are already under pressure on several fronts in their
lives. Inability to pay caused by one or a combination of the
debt triggers referred to earlier was common. The interviewee’s
financial position had invariably deteriorated from the time
the original loans were taken out. Also, understanding of the
5802 - About Banking 5.indd inside:7
significance of the legal procedures was generally poor and this
meant that money advice was often accessed late or too late.
In terms of the outcomes for creditors the picture was not
particularly bright either. Some pursued this procedure to
the endgame only to accept - often through the intervention
of a MABS money adviser - that the debtor was basically
telling the truth about the financial situation all along. Where
imprisonment resulted in a handful of cases, the creditor still
had to pursue the matter on the debtor’s release. On the plus
side, the accommodations reached between creditors and
money advisers once the client sought help were encouraging.
What this illustrates is that the current system is not working
– neither for the debtor nor the creditor - and points to the
desirability of a quasi-judicial approach. For example, once a
creditor has obtained a court judgment that a sum of money is
owed, there seems little point in decisions on repayments
taking place in open court. Equally, the setting of repayments
must take all creditors into account where there is more than
one debt.
The case for setting up a debt rescheduling tribunal, where
the financial circumstances of the debtor are examined in
their totality prior to setting appropriate repayments is worthy
of serious examination. A minimum income must also be
guaranteed to the debtor (and dependants) to enable life to
continue with some normality whilst debts are being repaid.
Otherwise, arrangements made are unlikely to last. If a debtor
were to default on agreed repayments, attachment of earnings
orders would ultimately be available to creditors, whereby
payments could be made directly from wages.
Creditors routinely point out that some debtors are ‘won’t pays’
as opposed to ‘can’t pays’. It is our view that, far from exposing
this limited number of cases, the current system masks them by
failing to engage early and repeatedly with the debtor through
good quality information and services.
A more sympathetic system would acknowledge that
overindebtedness is an inevitable by-product of inappropriate
credit or changes in a borrower’s circumstances. In practical
terms, it would focus on a realistic assessment of repayment
capacity behind closed doors backed by a comprehensive, State-
funded system of money advice and legal advice, and it would
provide for a modern consumer bankruptcy code in particularly
intractable cases. The debtor who still failed to engage in
meaningful negotiations would find it more difficult to hide,
while the person on the run from a myriad of financial and
other problems might just be more inclined to face them.
Both debtor and creditor advocates generally agree that
fundamental change is needed. Do we have to wait for a debt
crisis before it is considered?
1“ECB rate rise ‘may stave off property crash’”,
Irish Independent, April 3, 2007
Paul Joyce is a barrister and Senior Policy Researcher with Free
Legal Advice Centres Ltd in Dublin. FLAC provides both training
and legal support services to the Money Advice and Budgeting
Service (MABS). He is a member of the Financial Services
Ombudsman’s Council.
ABOUT BANKING 7
07/06/2007 17:28:16
 The Role of the Banking Sector:
A Central Bank Viewd
John Hurley, Governor, Central Bank and Financial Services Authority of Ireland
John Hurley, Governor of the Central Bank,
writes that the stability and health of the
banking sector in Ireland remains strong
and that, notwithstanding the risks of
adverse macroeconomic developments,
the sector is well placed to face the key
challenges that lie ahead.
A well-functioning banking system
is essential to a stable and efficient
modern market economy. The
contribution of banks to economic
growth in Ireland is very significant.
For this reason, their stability requires
continuous and careful monitoring
given the inherent risks of banking
activities. The Central Bank of Ireland’s
latest assessment in its Financial Stability
Report of the soundness and stability
of the banking sector suggests that its
health is robust, but there are important
risks that require ongoing attention.
The banking sector in Ireland has
experienced great change and its
structure now is significantly different
from what it was just 20 years ago.
With some 80 licensed credit institutions
operating here, the sector comprises
two broad categories as follows: those
banks that operate significantly in the
Irish domestic market and those that are
resident in Ireland but whose business is
mainly international. Interestingly, when
measured by total assets, both groups
are approximately the same size. The
nature of the banks’ balance sheets is
also very different from 20 years ago,
8 ABOUT BANKING
5802 - About Banking 5.indd inside:8
reflecting various regulatory, financial
and market developments such as
securitisation, the growth of off-balance
sheet activities including credit risk
transfer, the issuance of asset covered
securities and the implementation of the
new Basel II capital accord.
Pivotal role of banking
There are many ways in which the
banking sector plays a significant role
in the Irish economy. This ranges from
the broad economic contribution of
the sector through to monetary policy
transmission, the operations of the
payments systems and, crucially, in the
area of financial stability.
In terms of its direct contribution to
economic activity the size of the Irish
banking sector is large by international
standards; and the value of the
sector’s assets as a percentage of GDP
is one of the highest in the EU. The
direct contribution to the State in
terms of employment and taxation
is correspondingly large. The sector
employs almost 2% of the country’s total
workforce and contributed approximately
07/06/2007 17:28:16
 Central Bank Governor, John Hurley, with with Jean-Claude Trichet, President, European Central Bank (ECB), at the May 2007 meeting of the ECB’s Governing Council in Dublin.
4% of the State’s taxation revenue in
2005. Apart from its direct contribution,
the sector has a key role in intermediation
through mobilising savings and lending
funds that ultimately facilitate investment,
consumption and economic growth.
Monetary policy The implementation
of monetary policy in the euro area is
conducted on a decentralised basis, in
Ireland’s case by the Central Bank and
by the individual national central banks
in the other Member States. Banks are
essential intermediaries in transmitting
the changes in European Central Bank
(ECB) interest rates through to the wider
economy. This role manifests itself in
several ways.
When the ECB changes the interest rate it
charges to banks for borrowing, this has
a knock-on effect on the rates charged
by banks to their customers. Central
banks have strong leverage over short-
term interest rates; but less leverage over
longer-term rates. In particular, long-term
rates depend on expectations of future
short-term rates and these ultimately
depend on expectations regarding
the future path of monetary policy.
5802 - About Banking 5.indd inside:9
This, in turn, will have implications for
borrowers’ consumption and investment
decisions and will ultimately affect the
level of economic activity. Of course, the
objective of such interest rate changes is
to ensure price stability over the medium
term and in this way create the most
favourable environment for sustainable
economic growth.
Changes in monetary policy also affect
banks’ willingness to supply credit,
with consequent impacts on the wider
economy. For example, households
and firms may have to constrain their
spending if banks are less willing to
supply credit after a tightening of
monetary policy. Of course, this credit
channel is of greater importance for firms
that depend on banks as opposed to
those that have access to stock and other
financial markets for funds.
Payments system The payments system
is an essential component of the financial
infrastructure. An efficient and effective
payments system is a requirement for
meeting both the business needs of the
economy generally and the personal
banking requirements of the public at
large. The banking system is the fulcrum
of the payments system in respect of both
paper-based and electronic payments.
The Central Bank is the overseer of the
payments system and, consequently,
there are very close ongoing contacts
between the banks and the Central Bank
in this regard.
Financial stability Central banks have
a major interest in financial stability
because a stable financial system is a
prerequisite for implementing monetary
policy and is important for overall
economic performance and for ensuring
resilience to shocks. The Central Bank has
emphasised that the continuing stability
of the financial system - in the context of
domestic and international risks to the
economy - must be underpinned by a
healthy banking system with good shock-
absorption capacity. This emphasis on the
banking sector is justified because banks
interface with all of the other key players
in the system and are the most likely
channels through which financial instability
would be transmitted. The business of
banking is inherently risky and in the past
banking difficulties have been at the heart
of financial crises. In many countries, these
ABOUT BANKING 9
07/06/2007 17:28:18
 The Role of the Banking Sector: A Central Bank View
“A number of tools can be used to assess the state of the domestic
banking sector. These suggest that the stability and health of the
sector remain strong when measured by the standard indicators
such as profitability, asset quality and solvency.”
crises have been associated with very high
costs, in terms of loss of output for the
economies concerned.
The state of the domestic
banking sector
A number of tools can be used to assess
the state of the domestic banking sector.
These suggest that the stability and
health of the sector remain strong when
measured by the standard indicators
such as profitability, asset quality and
solvency. The results of the latest round
of stress-testing exercises carried out by
the Central Bank also point to a healthy
state of affairs. Important peer reviews of
our financial system - such as the recent
assessment by the International Monetary
Fund - have also been positive.
The central expectation of the Central
Bank’s financial stability assessment is
that the banking system is reasonably
well placed to withstand the impact of
any likely adverse developments in the
short to medium term. However, this
central expectation does not preclude the
possibility of adverse developments which
- should they materialise - could have
serious financial consequences for banks
as well as for the wider financial system
and the economy.
The financial strength of the banking
system is important because there are
important risks that require ongoing
monitoring. For instance, the Irish private
sector is now very highly indebted by
international standards. Despite the
fact that the Irish economy continues
to perform well, with strong economic
growth and favourable prospects for the
labour market, the risks to the macro
economy arising from both domestic and
international developments are increasing.
There are also some concerns with
respect to the outlook for the health
of the banking system that originate
from within the system itself. Some of
these key concerns are the persistently
high rate of credit growth (though
now moderating), the concentration
of income and loan books in property-
10 ABOUT BANKING
5802 - About Banking 5.indd inside:10
related business, a banking sector that
is increasingly reliant on non-retail, non-
domestic deposit sources of funding, and
low net interest margins.
Lessons from international trends
The banking industry has been subject
to profound change worldwide in
recent decades. Almost all of the unique
functions that banks have traditionally
performed now appear to be subject to
competition from outside the banking
system. In particular, banks’ core
intermediation business of deposit-taking
and lending is diminishing in relative
terms, as firms are increasingly raising
“Although Irish banks
share the experience
of other countries
with respect to the
pressures on net
interest margins,
they have been
able to more than
compensate for this
by rapidly expanding
the scale of their
on-balance sheet
business.”
funds directly from financial markets; also,
many depositors are bypassing banking
products in the search for higher yields
and better risk diversification.
This competition between banks and
financial markets is manifesting itself
in several ways; for instance, through
consolidation and a reduction in the
number of banks, a greater reliance by
banks on non-retail sources of funding,
a change in the sectoral composition of
lending towards households and away
from corporates’ lower net interest
margins, an increasing proportion of
income coming from off-balance sheet
activities and an increasing reliance on
credit risk transfer instruments.
To some extent, the exceptionally good
performance of the Irish economy over
the past 15 years has placed the Irish
banking sector in an unusual position by
international standards. Although many
Irish banks earn significant levels of non-
interest income, in general the banking
sector here has continued to earn the
larger part of its revenues from traditional
banking activities. Strong economic
growth combined with a booming
housing market have ensured, at least to
date, that traditional banking activities
have remained profitable.
Although Irish banks share the experience
of other countries with respect to the
pressures on net interest margins, they
have been able to more than compensate
for this by rapidly expanding the scale of
their on-balance sheet business. However,
a softer housing market combined with
slower economic growth should mean
it is likely that the international trends
mentioned above will begin to come
more to the fore in Ireland also.
Important challenges lie ahead for the
Irish banking sector - not least from the
risks in the current environment, but also
the likelihood that banks will face greater
competition for almost all of the unique
functions that they have traditionally
performed. The Irish banking sector has
shown that it is well placed to face such
challenges, but these issues require the
ongoing attention of the Central Bank,
the industry and its representative bodies
such as the Irish Banking Federation.
07/06/2007 17:28:19
 Together we can
Help Stop the Hurt

The work of the ISPCC can only be made possible by

your generosity so please donate today.
In 2007 the ISPCC needs to raise €5.1 million to
continue working with vulnerable children in Ireland.

You can donate today by:

Sending a cheque or postal order to: ISPCC, 29 Lower Baggot Street, Dublin 2
Donating directly to our bank account:
Bank of Ireland, College Green, Dublin 2
Account No.: 10027207
Sort Code: 900017
For more information about the work of the ISPCC
and other ways that you may be able to help please contact:
Dublin: (01) 676 7960
Cork: (021) 450 9588
Limerick: (061) 400077
Galway: (091) 752387
Email: info@ispcc.ie
Web: www.ispcc.ie

5802 - About Banking 5.indd inside:11 07/06/2007 17:28:21

 Ireland: Banking on
Future Competitiveness
Dr. Don Thornhill, Chair, National Competitiveness Council

We need better policies in key areas such as

infrastructure, energy and payment systems to
drive the productivity growth that can deliver our
future competitiveness, writes Dr. Don Thornhill.

The Irish economy has been a growth. Ultimately, our economic

remarkable success story over the past
20 years. Consistently high economic
growth rates have gone hand-in-hand
with remarkable social progress, and
with the near elimination of long-term
unemployment. Ireland has gone from
being a nation of emigration to a home
to hundreds of thousands of new
workers and their families. Ireland also
scores extremely well in international
rankings of quality of life. The 2006 UN
Human Development Index now ranks
us in fourth position, ahead of countries
we have long admired such as Sweden,
Canada, Switzerland, Finland and Japan.
Our position in this index has advanced
by 14 places since 2004, based on
Ireland’s improving levels of wealth,
health, life expectancy and education.
prosperity depends on our ability to
sell goods and services abroad. In this
regard, growth from international trade
is no longer contributing to economic
growth (see Figure 1). At the same time,
the balance on our current account
suggests that we are no longer living
within our means (see Figure 2).
As a small open economy, Ireland’s
guiding principle is that we need to
be able to earn a living abroad; and to
do this we must be able to compete
internationally. While we are still a
strong trading nation, our share of
world markets has begun to dip, as
resources have shifted towards domestic
consumption and construction (see
Figure 3).

However, the story of Irish economic
growth has changed in recent years.
As a result of our successes, domestic
demand from Irish consumers,
particularly for houses, has been the
main driver of economic expansion and
employment growth.
It is, of course, good news that we now
have the resources to address deficits
in our housing, transport and broader
social infrastructure such as health and
education. But we cannot rely on strong
domestic demand, supported by high
levels of borrowing by households, to be
the main long-term driver of economic
The changed nature of Ireland’s growth
is also reflected in our productivity
statistics. Irish productivity growth,
which has been remarkably high, is
slowing down. Productivity is the key to
ensuring that we can achieve the twin
objectives of keeping our goods and
services competitive on world markets
while remaining a high-income country
and improving our incomes further.
Key drivers of productivity growth
The challenge facing us is to reverse
these trends. Stimulating productivity
growth and regaining international
market share must be key policy

12 ABOUT BANKING

5802 - About Banking 5.indd inside:12 07/06/2007 17:28:21

 Figure 1: Contribution of Growth in Net Exports to Economic Growth Figure 2 : Ireland’s Current Account Balance Ebn Figure 3: Ireland’s Share of World Markets
% 4
3.0%
% 2
2.5% Services

% 0
2.0%
% -2
1.5% Total
% -4
-6 1.0%
% Merchandise

-8 0.5%
%
-10 0.0%
%
2001 2002 2003 2004 2005

Source: Central Statistics Office Source: Central Statistics Office; ESRI Source: World Trade Organisation

objectives. These are the issues which
the National Competitiveness Council
(NCC) addresses in its latest report,
Ireland’s Competitiveness Challenge. It
outlines policy recommendations across
the following areas:
• Labour force
• Social capital
• Public income and expenditure
• Regulatory environment
• Infrastructure
• Productivity of Irish-based enterprise
• Ireland’s education system
• Innovation, research and development
• Costs of doing business in Ireland
• Energy
Our policy proposals under all of these
headings are designed to stimulate
productivity growth and improve our
ability to sell goods and services abroad.
The issues of infrastructure, energy, costs
and the knowledge economy are key
priorities for government.
Infrastructure The NCC welcomes
the National Development Plan 2007-
2013 (NDP). It proposes a wide range
of investments that will improve
productivity by removing infrastructural
bottlenecks which increase costs. It will
enhance the skills of graduates and
people already in the labour market
and will create a more supportive
environment for enterprises in
developing new products and services.
Concerns have been expressed that the
NDP will lead to further price inflation,
which could squeeze out companies
already facing intense price competition.
That is certainly a risk if the programme
is not managed effectively. In the NCC’s
view, the potential inflationary risk can
be managed by careful prioritisation
and evaluation of projects. Enhancing
the delivery capacity of the construction
sector can also help; for example, by
designing projects on a sufficiently large
scale that they become attractive to
strong international players with the
capabilities to deliver. We have benefited
from having an economy that is very
open to inflows of capital and labour.
We should now make sure that we
attract international financial and project
management expertise and capacity.
Energy A key, immediate concern
facing our enterprise sector is the need
to have energy supply that is both
competitively priced and secure. The
NCC welcomes the recent publication of
the White Paper on Energy. In Ireland’s
Competitiveness Challenge, the NCC
supports the complete separation of
electricity generation and transmission
as essential to promote competition and
investment from new entrants.
The price of electricity in Ireland has
gone from 15% below the EU-15
average in 1996 to 13% above in
2006. Going forward, we would like
to see clear targets set out for Ireland’s
future price competitiveness. We need
a determined strategy to reduce the
growing electricity price differential
between Ireland and the countries with
which we are competing. The NDP
indicates that exchequer funds could be
used to support the national security of
electricity supply. The NCC sees electricity
interconnection and increased fuel
storage capacity as strategic priorities for
State funding or action. It is important
that these be acted on quickly.
Cost competitiveness Inflation and a
strengthening euro mean that Ireland’s
cost competitiveness has weakened
significantly in recent years. The costs
of property, utilities and locally-traded
services such as IT services, accountancy
and legal services, are now very high
in Ireland compared with the countries
with whom we compete for trade and
investment. Like the NDP, the White
Paper on Energy and government
initiatives in other areas, a co-ordinated
strategy to restore Ireland’s cost
competitiveness is of vital importance.
This must cross a range of policy areas,
including utilities, locally-traded services
and land.
Controls or restrictions that reduce
competition and innovation or add
to costs should be tackled. In order
to give a continuous dynamic to
pro-competition policies, the NCC

ABOUT BANKING 13

5802 - About Banking 5.indd inside:13 07/06/2007 17:28:22

 Ireland: Banking on Future Competitiveness
recommends that government
departments be required to respond
within a stated fixed time period to
reports from the Competition Authority.
A strong focus on land planning is also
vital to regaining cost competitiveness,
given the high costs of property here.
We need a sufficient supply of zoned
and serviced land and a strategically
focused spatial planning system.
Education The education system is
recognised as a key, long-term source
of competitive advantage. Ireland’s
education system has made significant
progress in recent years. Further
actions are required to make our
system one of the best in the world.
The NCC supports the establishment
of a pre-primary education system, the
development of cross-departmental
strategies to further improve secondary
school completion rates and policies
to make life-long learning a reality -
particularly for the large number of Irish
workers who do not have a Leaving
Certificate qualification.
The NCC also strongly supports the
implementation of the Government’s
Strategy for Science, Technology and
Innovation. Continued reforms and
additional funding will be required if our
higher education system is to establish
a world-leading position in teaching,
learning, research and development.
The planned doubling of PhD graduate
numbers is a vital part of the strategy
to raise the capacity of the workforce
to generate and successfully apply new
knowledge; and, to do this, Ireland
must be attractive to international PhD
students, graduates and their families.
Financial services and
efficient payments
As we look to boost our competitiveness
in the years to come, the financial
services sector here also has an
important role to play.
Firstly, a mature and stable financial
services sector is one of the bedrocks
of all modern economies, enabling
firms and households to access capital,
store wealth and make payments
for transactions. Secondly, increasing
competition in the sector is welcome
in ensuring that the financial services
offered to firms and households in the
country are modern and innovative.
Thirdly, financial services are at the
forefront of a new generation of
exports, namely tradable services. Along
with computer services and business
14 ABOUT BANKING
5802 - About Banking 5.indd inside:14
services such as consultancy, the
financial services sector is increasingly
offering Ireland new avenues for the
sustainable creation of both jobs and
wealth. Finally, the provision of an
efficient, cost-effective payments system
is key to facilitating the day-to-day
conduct of business – corporate
and personal.
For all of these reasons, it is of vital
importance that we have an appropriate
business environment, including pro-
competitive legislation and efficient
regulation of the sector, the ready
supply of the appropriate skills and 21st
century infrastructure – in particular
broadband for communications and
airports for transport.
“As a small open
economy, Ireland’s
guiding principle
is that we need to
be able to earn a
living abroad; and
to do this we must
be able to compete
internationally.”
The Irish payments industry has risen
to the challenge to provide more
sophisticated infrastructure, so that both
the business community and personal
account holders can benefit from the
most efficient means of banking, and
Ireland can compete on an international
basis. More than 10 years ago an Irish
bank was amongst the first in Europe
to provide a virtual, real-time banking
service, (where the two sides of a
payment transaction were undertaken in
the same bank, the transaction appeared
instantaneously on both accounts once
the transaction crossed the virtual
bank counter).
However, Ireland’s position in relation to
international comparators is something
of a mixed bag. On the one hand,
almost all of the electronic offerings
provided by banks across Europe are
available to Irish users of payment
systems. On the other hand, as a
community our payments behaviour
patterns favour cash and cheques
which are the least efficient
payment mechanisms.
Electronic payments are the most
efficient, effective and secure
mechanisms for making payments.
Increasingly, the personal banking
customer is availing of internet and
telephone banking facilities and most
businesses pay their staff salaries using
electronic means. Experiments are
also underway with systems that use
the mobile phone as the conduit for
delivery of the payment. Mobile phone
payments represent an innovation
which could become the major person-
to-person payment method of the
future, diverting users from cheques
and cash.
However, Ireland is currently one of
only three countries in the euro area
using cheques to any significant extent.
European Central Bank figures (2005)
show us – like our British counterparts
- writing 32 cheques per head annually,
which is double the euro area average of
16. The French top the table writing 63
cheques per head annually.
As for cash, we are amongst the highest
users in Europe with approximately
70% of all payments under €100 being
made in cash. Again, this is confirmed
by European Central Bank figures
which show that, at over €5,500, we
top the EU table for the amount of
cash withdrawn annually per ATM card
– compared with the EU average of
€2,000. It is estimated that in excess of
€1,500 million per annum is tied up in
the servicing of cash. These costs range
from the obvious costs of security in
banks and businesses for the storage
and transportation of cash, to the cost to
society of the crimes attaching to cash.
This places a burden on our economy and
indeed on our society. And, while it must
be recognised that cash will continue
to be the major means by which value
will be exchanged by individuals, it is
important that we explore how this cash
dependency can be reduced and how
cash processing and distribution can be
handled in the most cost-effective way.
07/06/2007 17:28:24
 “The Irish payments industry has risen to the challenge to provide
more sophisticated infrastructure, so that both the business
community and personal account holders can benefit from
the most efficient means of banking, and Ireland can compete
on an international basis.”
Our usage of cards is amongst the
lowest in Europe, although we have
a very well-developed infrastructure
for accepting payment by card. This
acquiring infrastructure is one of the
most versatile in Europe, delivered
by the banks and strongly supported
through the efforts of the retailing
community. However, the Irish
payments industry faces two unique
challenges in the changing payments
environment: namely, the continuing
imposition of government stamp duty
on payment cards and cheques; and the
existence of official pricing controls on
bank transaction charges under Section
149 of the Consumer Credit Act. The
removal of these distortions is essential
in order for the industry to continue to
provide secure, robust, innovative and
competitive payment services to their
customers in the future.
Finland is a country which could serve
as a useful point of comparison for
Ireland. In terms of the usage of non-
cash payment mechanisms, Finland
is the best in Europe, while Ireland is
at the bottom of the table just ahead
of Italy and Greece. The improved
efficiency of payments will not, on its
own, move Ireland to the top of such
international comparisons of national
competitiveness, but payments do have
a significant role to play.
SEPA – a new dynamic
The movement towards the integration
of the Single Internal Market presents a
major shift in the dynamics of business
activity across Europe. This also impacts
on payments through the creation of
a Single Euro Payments Area (SEPA),
which will become a reality from January
2008. Paving the way for migration of
payments infrastructures, away from
domestic systems to pan-European
systems, this process is expected to be
complete within the subsequent three-
year period.
5802 - About Banking 5.indd inside:15
SEPA is largely a programme about the
electronification of payments across the
continent, as a result of which expensive
national legacy systems will not be
viable. There is no pan-European future
for cheques. Ireland therefore needs to
address the question of whether or not
it is economically viable and pragmatic
to continue to support such a minority
payment activity, at the expense of our
national competitiveness.
The benefits created by developments
across Europe, and the new
opportunities that they present to all
sectors of the community, can only
be fully enjoyed by greater use of
electronic payment mechanisms by
everybody. This requires the creation
of attractive solutions for those
who currently do not have access to
an account or a facility which will
handle electronic payments. Equally,
incentives are required to encourage
large, cheque-issuing customers to
use electronic alternatives. This is a
challenge that will be taken up by the
National Payments Implementation
Programme, a project which is
managed and driven by the Irish
Payment Services Organisation (IPSO) in
close co-operation with the government
and supported by the Irish Banking
Federation.
Conclusion
Ultimately, competitiveness is not
an end goal in itself but a means to
achieving higher living standards and
a better society. Ireland’s international
competitiveness has played a crucial
role in building this success and remains
critical if we are to maintain and build
further on the progress made to date.
Increasingly, many of Ireland’s economic
and societal goals are becoming
mutually dependent. For example,
many of the policy directions proposed
in Ireland’s Competitiveness Challenge
will enhance wellbeing, such as
the development of a pre-primary
education system, an active culture
of life-long learning, investment in
infrastructure, integration of migrants
and the promotion of active citizenship
and work-life balance. Promotion of
competitiveness and social progress are
inherently interlinked and supportive
and provide the route to better
standards of living for all.
A central challenge will be to move
back to a high-productivity growth rate
trajectory. To do this we will need to
increase the share of high-productivity
economic activities within overall
national output. Continuing investment
in high education levels and top-class
social, physical and communications
infrastructures are an essential part of
this strategy.
Dr. Don Thornhill is Chair of the National
Competitiveness Council and Chair of
the Irish Payment Services Organisation
(IPSO). He wishes to acknowledge
Stewart Mackinnon of IPSO and Ronan
Lyons of Forfás for their substantial
contributions to this article. Ireland’s
Competitiveness Challenge is available to
download from the NCC’s website,
www.competitiveness.ie. Further
information on SEPA and on the National
Payments Implementation Programme
can be accessed through www.ipso.ie.
ABOUT BANKING 15
07/06/2007 17:28:26
 The Institute of
Bankers in Ireland

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16 ABOUT BANKING
>[ndjVgZVbZbWZgl]dhViZmVbh^c'%%+dg'%%,i]ZEgdheZXijhl^aaVjidbVi^XVaanWZhZciidndj#

5802 - About Banking 5.indd inside:16 07/06/2007 17:28:26


Gerry McCaughey is one of the most
successful business people of his
generation. Seventeen years ago he
helped to set up Century Homes in
a small shed in Monaghan at a time
when timber frame homes were seen
as exotic rather than practical. He has
a single-minded vision for success
and a motto, ‘Persistence Beats
Resistance’, which has seen a novel
idea grow into the multi-million euro
international business that Kingspan
Century is today.
Starting up
It is just over two years since Gerry
McCaughey made the biggest decision
of his career by selling Century Homes
to Kingspan for €100 million. However,
like any good entrepreneur, it is the
journey and not the destination that
fascinates him most. “To me the most
important thing about starting a business
is that you have to be truly, madly, and
deeply committed to your idea. The ‘give
it a lash’ attitude might work for wealthy
people who can afford to lose money,
but it won’t work for somebody who is
in a start-up situation.”
5802 - About Banking 5.indd inside:17
Persistence Beats Resistance
Gerry McCaughey, Chief Executive, Kingspan Century
In this interview with About Banking, Gerry
McCaughey, Chief Executive of Kingspan
Century, speaks frankly about the essential
ingredients to building a successful
business – whatever the size.
McCaughey believes you have to know
the business in which you are getting
involved. “Any business, no matter how
well planned, is going to present you with
extremely difficult situations. You have to
do extensive research. Before I started in
the timber frame business I carried out a
phenomenal amount of research on the
industry. I had carried out four projects,
three in UCD and one in Dundalk
Regional Technical College, and as a result
I saw an opportunity in the market.”
He is convinced that getting his business
idea road-tested and analysed while in
college was very useful. “It allowed me
to examine a product in which I believed.
In the process of carrying out research, I
used to go to people who said it wouldn’t
work, and I’d listen to them and learn.”
Experience the market
It may seem like a contradiction, but, while
necessary, research is not a substitute for
the real experience of the market in his
view. “No matter how much research you
carry out, the reality will be nothing like
your business plan. If I’d known on day
one what I knew after five years, I would
probably never have done it.”
“If You Want to Make God Really Laugh
Show Him Your Business Plan” is the
title of a book. The minute you write a
business plan, it’s dead. Life has changed
and the world has moved on. People react
around you and things happen,” he says.
“When you get to the end of your first
five years, you will realise that very little of
what you said in your business plan has
happened, but it won’t matter as long as
the profit numbers at the bottom of the
page have materialised.”
But, despite the reality being far
removed from the ideal world, writing a
business plan is essential. “You need to
think that life as an entrepreneur is like
being the captain of a big oil tanker. He
knows his ship has to leave Dublin to
get to New York, but he doesn’t know
the exact route, or if there are going to
be icebergs or bad weather. He can plot
the straightest course, but something
will happen along the way to alter it.
The ship is slow to manoeuvre, and to
change direction he has to start five
miles out at sea, but he knows where
he is going. The same is true of
a business plan.”
ABOUT BANKING 17
07/06/2007 17:28:27
 “While from the entrepreneur’s perspective there is always scope for
further improvement, access to finance has definitely improved over the
years. A sound business proposition should not face difficulties in
getting the right type of financial backing.”
McCaughey is adamant that, in order
to be a success in business you have to
follow simple rules. “It’s an old saying,
but it’s true; turnover is vanity and profit
is sanity. The market lost sight of that
during the dot.com boom.”
He believes that there is no substitute
for getting stuck into the workings of a
business. “If you are not willing to get
your hands dirty, then don’t do it. It is
pointless setting up a manufacturing
business if you’re not willing to get your
hands dirty on the factory floor. If you
think it is a glamorous scenario with a
secretary sitting outside your office,
then you are in for a shock.”
Start small and learn
Starting small and making mistakes early
is one of McCaughey’s key pieces of
advice. “In the first two to three years it
doesn’t matter how big your company
is. Your only focus should be to make a
small profit. Your mantra, quite simply,
should be sell, sell, sell. Don’t get hung
up on getting to a €10 million turnover.
If, after three years, you can make a
small profit each year, you won’t have
a worry. You have to crawl before you
walk, before you run, before you leap.
In the first three years you will learn that,
no matter what, you will make mistakes.
Also, something serious will happen to
your product, and something will go
seriously wrong.”
“The most important thing during the
first three years is to put profit behind
you. In Century Homes our philosophy
was to always protect what we had left
behind us. In our first year we made
a small loss because a customer went
broke on us. In the second year we made
a profit of €30,000 which actually wiped
out the loss of the first year and then we
made €60,000 in year four. It took 17
years to be an overnight success story. If
I had tried to do that in year five or year
10 it wouldn’t have worked,” he adds.
18 ABOUT BANKING
5802 - About Banking 5.indd inside:18
“Image and perception are very
important in business. We never called
our sales staff reps, because calling
them executives is more professional.
We also never had any concerns about
giving them better cars than our
competitors because it made them look
more successful. We were very strict on
making sure they were always properly
dressed and looked like serious
business people, because in business,
success breeds success.”
Securing finance
McCaughey says the most frequent
question that he is asked by start-up
businesses is how to raise finance, and,
in particular, what he thinks of venture
capitalists. “My view of venture
capitalists is, whilst they provide a very
necessary role in the economy, they
should be the last port of call for a
start-up company.”
“I understand they are taking the risks
and they want to have a return for it.
What they are looking for is fair from
their perspective, but as a start-up
business, stay the hell away from them
until you have exhausted every other
route,” he adds.
He says the most important thing
about raising money is credibility.
“If you have a credible business
proposition, which will be
professionally run by people with
knowledge, you have a much
better chance of getting the funds
you require.”
“I’m not recommending that people
re-mortgage their house for their
business, although people do it. It is
possible to call on friends, family, and
there is always the bank. Depending on
your type of business you could go to
your local accountant and ask him to
organise funding for you,” he adds.
On the bank/business customer
relationship, McCaughey has this to
say: “While from the entrepreneur’s
perspective there is always scope for
further improvement, access to finance
has definitely improved over the years.
A sound business proposition should
not face difficulties in getting the right
type of financial backing.”
“People’s appetite for investing in
business is much stronger now than it
was 20 years ago. In many cases they
won’t look for equity, but for a higher
return on their investment.”
He gives an example: “Say a start-up
business needs €200,000, but the bank
will only lend €100,000. Then it can’t
be done. But what if someone says
they’ll lend the €100,000 at 15%. It’s
high but there is no dilution of equity
and it can be paid back. It gets the
business off the ground.”
The power of profit
McCaughey feels that the power of
profit should never be forgotten, and
he is cynical about some of the more
‘touchy feely’ aspects of modern
business. “The three most important
words in business are profit, profit,
profit. From an employer’s perspective,
less than 5% to 10% of the employees
in a business are absolutely critical
to its success. If you are a 10-person
operation you are looking for one
other person you can absolutely trust.
When you get to 500, like we have,
you need 50 important people.”
“Some people say: ‘your people are
your most important assets’. That’s
rubbish. Your most important asset is
your customer. That said, if you find
somebody who is very talented, and you
don’t have a job for them, offer them
one anyway.”
07/06/2007 17:28:29
 Focus Ireland
Golf Tournament
July 5th 2007 at Carton House Golf Club,
home of the 2006 Nissan Irish Open

Book Early Ph: 01 8815900 or email events@focusireland.ie

Everybody has a right to a

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5802 - About Banking 5.indd inside:19 07/06/2007 17:28:30

 The Role of Pricing in Retail Banking in Ireland
Ireland’s Asset Covered
Securities Regime
Paul O’Connor, Head of Wholesale Banking and Risk, Irish Banking Federation
With the Irish asset covered
securities (ACS) market growing
from zero to some €65 billion
in issuance in the space of five
years and now representing the
7th largest market worldwide,
the latest amendments to the
legislative framework are important
and opportune. The Irish Banking
Federation’s Paul O’Connor
documents the significance of
these changes.
The Asset Covered Securities
(Amendment) Act 2007 was signed
into law in April. The Act updates
the original Asset Covered Securities
(ACS) Act of 2001 and represents the
successful outcome of a collaborative
approach between the industry, through
IBF, the Financial Regulator and the
Department of Finance.
The initial trigger for amending the ACS
legislation was the introduction of the
Capital Requirements Directive (CRD).
The new legislation will ensure that all
ACS issuance will be compliant with
the CRD. In making the amendments,
the opportunity was taken to further
enhance the legislation in order to keep
ACS at the forefront of the covered
bond market. The specialist banking
principle is maintained - only specialised
rather than general banks can issue
ACS, unlike in some other covered bond
frameworks. Furthermore, provision is
made for the issuance of commercial
mortgage ACS. [See the box entitled
‘What are Asset Covered Securities?’
for a description of ACS.]
20 ABOUT BANKING
5802 - About Banking 5.indd inside:20
The key changes to the ACS legislative
framework, which enhance investor
protection, can be categorised as
follows: quality of eligible assets, risk
control and monitoring and compliance.
Quality of eligible assets
The developments in the eligible asset
criteria have been driven by the desire to
maintain high-quality and well-diversified
cover pools.
Public sector The original legislation
allowed assets from countries in the
European Economic Area (EEA), but
had a 15% limit on assets from the
US, Canada, Switzerland and Japan.
This limit has been removed in order to
enhance diversification opportunities and
credit quality. In addition, assets from
New Zealand and Australia (both Triple-A
rated) are now eligible for cover pools,
as are loans to multilateral development
banks; previously only loans to the
European Investment Bank (EIB)
were eligible.
Residential Mortgages The amended
legislation makes securitised mortgage
credit – residential mortgage-backed
securities - eligible for the pool, thereby
enhancing the credit quality and
liquidity of the mortgage assets in the
pool. Diversification opportunities are
also enhanced with the inclusion of
mortgages from highly-rated countries
outside the EEA, namely the US, Canada,
Switzerland, Japan, New Zealand
and Australia.
07/06/2007 17:28:31

Commercial mortgages As stated above, the amendments to
the legislation mean that it will be possible to issue ACS backed
solely by commercial mortgages. To ensure transparency of
asset pools, commercial mortgages will sit in wholly separate
cover pools to residential mortgages.
Risk control
There have been several enhancements in this regard.
Legislative overcollateralisation There is now an obligation
to maintain 3% overcollateralisation (basically having 103 units
of assets for every 100 units of bonds issued) for residential
mortgage and public sector ACS. For the commercial mortgage
ACS the mandatory overcollateralisation is 10%.
Pool hedge collateral Legislative amendments will ensure
the transparent and straightforward management of hedge
collateral. This will make the use of derivatives to manage interest
rate and currency exposures more straightforward for issuers,
enhancing risk management for the benefit of bondholders.
Duration calculation The duration gap calculation ensures
that the maturity profile of the cover assets at least matches
that of the bonds issued. The calculation has been simplified
and strengthened in order to enhance investor protection.
Monitoring and compliance
The ACS legislation sets the highest standards in terms of
monitoring and compliance. The frequent reporting of cover pool
and issuer information and the real-time monitoring of that data
by an independent monitor mean that the ACS market retains
the strongest oversight. Nevertheless, the legislative changes
enhance that position by ensuring independent oversight of
both the contractual and legislative overcollateralisation.
Into the future
IBF is currently engaged in developing the secondary
legislation that is required to make the updated legislation
operational and, once again, is collaborating with the
Financial Regulator. We look forward to further growth in this
market. The creation of commercial mortgage ACS affords
opportunities for new issuance and new issuers. In addition,
the new legislation presents an opportunity to internationalise
the ACS market, with the possible inclusion of mortgage-
backed securities in the cover pool making it easier to issue
5802 - About Banking 5.indd inside:21
Luca Bertalot, Adviser, European
Covered Bond Council, pictured
here with John Clinton, Programme
Manager, IBF, visited IBF and member
banks to assess the impact of the
new legislation.
ACS with international assets. Together with the enhanced
investor protection, Ireland should continue to be an attractive
location from which to issue covered bonds.
What are Asset Covered Securities?
Asset Covered Securities are a type of covered bond.
Covered bonds are very secure instruments (often
Triple-A rated) that are issued by banks and backed by
high quality assets (generally mortgages or loans to
public bodies). In the unlikely event of the insolvency of
the issuing bank, investors are protected as they have
recourse to the asset pool backing the bonds.
Covered bonds were first issued in Denmark over 200
years ago and are now issued throughout Europe -
particularly in Germany, Spain, France and the UK. More
recently, covered bonds have been issued by banks in
the US, paving the way for the internationalisation of
the product.
Ireland joined the club of covered bond issuers in
2002. The first ACS issued was a public sector ACS (i.e.
backed by loans to public bodies) issued by DEPFA ACS
BANK. Since then, three other banks have issued ACS,
including the first mortgage ACS issued in 2004 by
Bank of Ireland Mortgage Bank, along with issues from
WestLB Covered Bond Bank (public sector ACS) and AIB
Mortgage Bank (mortgage ACS).
All four issuers continue to be highly active in the ACS
marketplace. For example, DEPFA recently issued a
30-year US dollar ACS, notable for its long maturity
and very high level of placement into the US. WestLB
continues to issue non-euro denominated private
placements off its MTN (medium term note) programme.
On the mortgage side, Bank of Ireland has issued one
ACS a year since its first issue in 2004, while AIB issued
three ACS in 2006, the most recent in December.
ABOUT BANKING 21
07/06/2007 17:28:32

Over recent years we have witnessed
growing debate about the scope for
increased institutional investment in the
private rented housing sector. Many
argue that such a development would
only yield good results, as it would
bring in long-term investors who would
achieve economies of scale and make
attractive returns. Corporates would also
be more likely, some argue, to manage
their portfolios well and to keep them
in a good state of repair – unlike many,
but by no means all, individual landlords.
Sounds good in theory, but is this how it
would work in practice?
Market fundamentals
Ireland experienced a very significant
increase in the population in household
forming age groups in the 1990s,
driven by a number of factors, including
immigration and growth in student
numbers. Because of a shortage of
new housing, exacerbated by planning
constraints, there were very substantial
real increases in house prices and rents
during this period, creating a strong
framework for the entry of new investor
landlords who purchased 25% of
new builds.
Individual landlords own the vast
majority of the private rented stock,
while companies own just 10%.
Landlords have very small portfolios: the
majority own only a single property and
manage it themselves. One to three-bed
apartments are the most common type
of recent investment. There has been
little new supply at the bottom end of
the market and low-income supply has
22 ABOUT BANKING
5802 - About Banking 5.indd inside:22
Institutional Investment in the
Private Rented Housing Sector
Professor Tony Crook, Pro Vice Chancellor, University of Sheffield
Research indicates slim prospects for achieving
greater institutional investment in the private
rented sector in Ireland and the UK, according
to Professor Tony Crook.
actually fallen. At the same time, there
has been growth in the number of low-
income households, who are dependent
on supplementary welfare allowance and
whose costs have increased as a result of
rising rents.
The evidence suggests that rents just
about cover landlords’ mortgage and
other costs such that investor returns
depend on capital appreciation (which
has been very good in recent years). Tax
instruments (capital allowances in the
past, interest deductibility and stamp
duty at present) all appeared important
in shaping the market in recent years.
Funding for investor landlords was
readily available, with acquisitions
funded by borrowing. Little equity was
needed and was often funded by loans
on landlords’ own homes. Some 33%
of residential lending in the late 1990s
was to investors in the private rented
sector. However, despite this apparent
appetite for funding, lenders have not
been interested in committing equity and
there is little, if any, other institutional
equity investment.
In calculating investor returns, the
following definitions were used: annual
gross and net income and total returns
(the latter included annualised capital
appreciation) expressed as percentages
of capital value. The lack of data made
calculations difficult but we estimated
that for 1999-2000, gross income
returns were around 6% to 7% with net
income returns around 4%. Total returns
were considerably higher at 34% and
estimated to be comparable with office
property. In mainland Europe residential
returns were found to be comparable
with office investments - providing
a prima facie case for residential
investment by institutions, including on
diversification grounds.
Barriers to institutional investment
Despite this prima facie case, our
research (based here on interviews
with institutions) suggests several
barriers to institutional investment. First
up are property management issues,
including the risks of adverse publicity
(despite new legal arrangements) and
the high management costs compared
with commercial property. Institutional
investors also seek large portfolios but
these can be difficult to acquire.
Secondly, the returns are not seen as
competitive. This is as true of foreign as
of domestic institutions with the former
- some of whom are active investors
in the private rented sector in their
home markets - seeking gross income
returns of 10-12%. These levels of
return are simply not available except in
niche markets. Whilst total returns are
comparable with other property, because
the private rented sector is a novelty,
potential investors want a risk premium
to cover this.
Taxation is also an issue. Whilst
the treatment of all directly-owned
property is the same, institutions have
a preference (assuming the returns are
sufficient) for indirect investment. Hence,
there is a role for intermediary vehicles
and tax arrangements to facilitate
07/06/2007 17:28:34
 indirect investment; such as UK-type
Housing Investment Trusts and US-style
Real Estate Investment Trusts.
Thus, our provisional conclusion is that
the sector in Ireland is a cottage industry,
where small-scale investors seek capital
gains, manage their portfolios in their
spare time and get good total returns
from doing so. In contrast, the income
returns are too low to match the needs
of institutional investors and it is difficult
to see good prospects for them.
If a more positive climate were to be
created for institutional investment, it
would require several initiatives including
the following: an investment databank,
without which it is very difficult to
estimate returns and to undertake
due diligence; tax transparency for
intermediary vehicles; and structuring
involvement around a public-private
partnership, targeting low-income and
other groups using Part V of Planning
Act to lever in funds.
The UK experience
Our research suggests that the prospects
for institutional investment in Ireland
are not good. Nor would it appear
that there is inspiration to be found
in the UK’s experience. Here a major
policy effort has been made to increase
corporate ownership and institutional
investment, but with very limited results
to date.
Deregulation in 1988 was intended to
create a profitable sector by improving
liquidity, reducing risk and fostering
competitive returns. All UK governments
since then have been keen to encourage
corporate ownership and institutional
investment, so as to improve the
sector’s reputation, to achieve efficient
management through economies of
scale, to improve liquidity and spread risk
through diversification, and to attract
large-scale equity funders seeking
long-term income returns. Several
initiatives have been taken to achieve
these objectives.
The Business Expansion Scheme (BES)
was extended to the sector in 1988 as
a tax-driven instrument for individual
equity investors in private companies.
By 1994, 903 private renting companies
had been formed, €4.4 billion raised
and 81,000 dwellings acquired.
However, almost all had short-term
horizons driven by capital gains; and
income returns were low.
5802 - About Banking 5.indd inside:23
Most companies have since been
dissolved and the properties sold. A very
large tax expenditure of over €29,000
per dwelling was incurred. While the BES
showed that there was an appetite for
investment, in reality this depended on
capital gains and not on income returns.
Housing Investment Trusts (HITs) were
designed to facilitate indirect investment
with some element of tax transparency -
important for gross funds. No HITs were
formed despite evidence that there was
a lower political and ‘novelty’ risk. This is
because many barriers remained.
“...the sector in Ireland
is a cottage industry,
where small-scale
investors seek capital
gains, manage their
portfolios in their spare
time and get good
total returns from
doing so. In contrast,
the income returns are
too low to match the
needs of institutional
investors and it is
difficult to see good
prospects for them.”
These included market risk, the
small scale of portfolios, poor quality
management, poor market information
and the fact that HITs were not fully tax
transparent. As a result, HITs required
returns in excess of the market if
they were to attract investors: none
did. However, there has been some
investment via limited partnerships and
property unit trusts.
The Barker Report on Housing Supply
in 2004 recommended bespoke tax
transparent investment vehicles to
expand supply by commissioning
new builds, with incentives to
maintain properties and manage them
professionally and with long-term
investment promoting stability in the
housing market. The UK’s Finance Act
2006, enabled US-style Real Estate
Investment Trusts (REITs) to be formed
from January 2007 with rules on
listing, conversion, gearing and profit
distribution. REITs provide for full tax
transparency, provided 95% of net
returns are distributed to shareholders.
Since January several large listed
commercial property companies have
converted to REITs, with some limited
indication of interest in residential
REITs. For example, Invista Real Estate
has stated its intention to convert to
a REIT with €735 million of existing
assets and 20 not-for-profit housing
associations are expected to create a
REIT with €368 million from existing
unencumbered assets. But the general
expectation is that few residential REITs
will be launched as net returns are not
sufficiently attractive and adequately
sized portfolios are difficult to source.
Thus, instead of the hoped-for large-
scale institutional investment, Britain
has had a buy to let phenomenon. In
fact, this is the long-standing pattern
of individual investors buying property
to let – the country’s very own cottage
industry. The recent nuance to this
is an initiative by the Association
of Residential Letting Agents - in
association with the major lenders - that
reinforces the trend to professional
management, reduces premia on
investor loans and fosters higher equity
returns through gearing.
In contrast, there has been no evidence
of growth in ownership by corporate
landlords. If anything, more and more
new landlords are private individuals
and portfolios are getting even smaller.
In Britain, as in Ireland, the sector
is a good investment for individuals
looking for capital growth and willing
to look after their own property. Does
this suggest that attempts to create a
corporate sector with equity funding
from institutions are unlikely to succeed
in Ireland and in Britain? Or are
there lessons to be taken from those
countries with greater participation from
institutions such as the Netherlands?
There is scope for further debate on
this issue.
Professor Tony Crook is a non-executive
director of several housing agencies in
Britain and is also a Trustee of Shelter,
the national homelessness charity in
the UK. This is an edited version of a
paper presented at the 2007 Threshold
annual conference and draws on
research sponsored by the Irish Banking
Federation and undertaken for Threshold
(with Dr Steven Rowley).
ABOUT BANKING 23
07/06/2007 17:28:36
 Promoting Professional Skills in Financial Services
(L to R) Anthony Walsh, Chief Executive, Institute of Bankers in Ireland, Patrick Neary, Chief Executive, Financial Regulator, Sean Wade, Chairman, Association of
Compliance Officers in Ireland, Professor Tom Begley, Dean, UCD Michael Smurfit School of Business.
Promoting Professional Skills in Financial Services
The Institute of Bankers launches two new Executive MBA Programmes
An Executive MBA (Master in Business
Administration) programme in Financial
Services and an Executive MBA in
Regulation and Compliance were recently
launched by the Institute of Bankers in
Ireland’s School of Professional Finance.
Designed for managers and professionals
working in financial services, these
programmes will be delivered in the
Institute’s Conference and Learning
Centre in the IFSC by the UCD Michael
Smurfit School of Business in partnership
with the School of Professional Finance
and, in the case of the Regulation and
Compliance specialism, in association
with the Association of Compliance
Officers in Ireland (ACOI). Both MBA
programmes are provided part-time
over two years and are due to begin in
September 2007.
Speaking at the launch, Patrick Neary,
Chief Executive, Financial Regulator,
stated: “The Financial Regulator warmly
welcomes these new Executive MBA
programmes. We see the education of
24 ABOUT BANKING
5802 - About Banking 5.indd inside:24
skilled professionals not only as key to
ensuring both a vibrant industry with
well-run firms but, very importantly,
towards ensuring customers are well
served with suitable products and
informed financial advice.”
Professor Tom Begley, Dean, UCD Michael
Smurfit School of Business remarked that
the collaboration with the Institute of
Bankers in Ireland and the ACOI “reflects
the Smurfit School’s commitment to
developing leadership and managerial
skills and, in so doing, meeting industry
and economic needs in Ireland.”
The School of Professional Finance (which
is a recognised School of UCD) also
provides two other degree programmes.
At master’s degree level the MSc in
Risk Management aims to increase the
supply of well-qualified risk management
professionals in Ireland - a need identified
by the Institute of Bankers and member
banks of the Irish Banking Federation
(IBF) and of the IBF-affiliated Federation
of International Banks in Ireland. It is
designed for practicing risk management
professionals in banks and financial
Institutions, as well as those who work in
related fields or who anticipate moving
into risk management.
Finally, the Bachelor of Financial Services
(BFS) is a part-time primary degree
specifically designed for people working
in financial services. Almost all modules
of the Institute’s diploma and certificate
courses provide credit towards the BFS
as part of a ladder of opportunity which
helps Institute members to achieve their
full educational potential.
Further information on all degree
programmes is available from the
Institute of Bankers’ customer service
team telephone 01-6116500 or from the
Programme Managers in the Institute:
Gerry Grenham (MBA), Finbarr Murphy
(MSc Risk Management) or Jonathan
McConnell (BFS).
07/06/2007 17:28:36
5802 - About Banking 5.indd inside:25 07/06/2007 17:28:39
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5802 - About Banking 5.indd 1 07/06/2007 17:27:44