Northern Ireland: banking on recovery? - Northern Ireland Affairs Contents

2  Northern Ireland's banks: a block to recovery?


4. When the economy of the Republic of Ireland grew spectacularly from the mid-1980s onwards, much of the extra wealth generated within the banking system was diverted into property. The resulting boom affected both commercial and residential property prices so, when the property bubble burst in the wake of the 2007-08 financial crisis, it left Irish banks highly exposed to bad debts. The Irish Government, seeking to avoid banks failing, made generous guarantees to bank creditors, resulting in a banking problem which exacerbated significantly Ireland's financial crisis of late 2010.

5. Banking sector problems were specifically severe across the island of Ireland due to aggressive property lending and too many short-term, over-ambitious acquisitions of property. Traditional lending values were lost sight of in the light of over-ambitious lending targets and poor housekeeping, and were swept away in the scramble for growth, resulting in many of the banking sector failures.

6. There are close economic ties between the UK and the Republic of Ireland, with the relationship between Northern Ireland and the Republic being especially close; in its document Rebalancing the Northern Ireland Economy, published in March 2011, HM Treasury estimated that 28 per cent of exports from Northern Ireland went to the Republic.[3] These ties led to the UK Government lending the Republic of Ireland £3.2 billion at the beginning of the crisis. As Sajid Javid MP, the then Financial Secretary to HM Treasury, told us in evidence:

    … one of the key drivers for the UK making that loan available was the integration of the economy of the Republic with the rest of the UK, but in particular with Northern Ireland. Part of our motivation was that it was in our own economic interests that the Republic has a speedy recovery from its economic problems.[4]

The banks' current positions

7. None of the four major retail banks in Northern Ireland (Bank of Ireland, Danske Bank, First Trust Bank and Ulster Bank) are headquartered in Northern Ireland. First Trust Bank and Bank of Ireland are subsidiaries of Dublin-based banking groups, Danske Bank's[5] parent is based in Copenhagen, while Ulster Bank's Head Office in Belfast reports to Royal Bank of Scotland's Headquarters in Edinburgh. In its memorandum, IBOA The Finance Union,[6] which represents financial services sector staff in both the UK and the Republic of Ireland, stated:

    The distance between the board rooms where key decisions about credit and risk are made and the areas in Northern Ireland affected by them is a further concern-especially as many banks with international interests have retrenched to their home markets since the crisis began. Without the intervention of local public representatives, this trend may have been more pronounced in Northern Ireland.[7]

8. Although being part of a larger group has advantages in matters such as access to capital, etc, a parent company will always be able to influence a subsidiary's decision, usually in view of the PLC status of the parent, and the banks in Northern Ireland are no different in this regard; local management may be set targets or policy parameters by the parent, and they do have responsibility for the delivery of growth and profit aspirations. The most important aspect at local level is that they are the interface with the customer.

9. Since Danske Bank completed its takeover of Northern Bank in April 2006, it has closed branches in some rural towns, reducing the total from 72 branches across Northern Ireland in April 2012 (under Northern Bank) to 53 branches under Danske Bank. The Bank appeared to have more of an emphasis on online banking, hence the branch closures, but there had been considerable concerns that elderly, and rural based, former Northern Bank customers now would have to travel long distances to access an alternative branch.[8]

10. The banks in Northern Ireland are re-examining their position in the market and the need for extensive branch networks. In order to facilitate branch closures, Northern Ireland's banks have entered into specific arrangements with the Post Office to meet the needs of those customers who were previously dependent on their local bank branch.[9] In its memorandum, the Post Office also states that it has 484 branches in NI, around 330 of which are in rural locations.[10]

11. The situation concerning branch closures would have been exacerbated if reports from July 2013 that Ulster Bank was planning to close up to 40 branches across the island of Ireland by the end of 2014 were accurate,[11] although the then Finance Minister, Sammy Wilson MP MLA, said that he had been assured that the number of Northern Ireland branches closing would be in single figures, and over a longer period of time.[12]

12. Under the plans, Ulster Bank would close many mainly rural branches and reduce staffing levels. It would keep open 175-185 branches, down from the current 214 (and the 238 branches in 2012) number. The remaining branches would be focused on urban centres, with the Bank investing in its internet banking service to increase online usage. Of Ulster Bank's, approximately, 5800 employees, some 1800 were expected to leave, which the bank hoped would be through natural wastage.

13. In its memorandum, the Consumer Council for Northern Ireland (CCNI) said that:

    With 53 bank branch closures ... during the past two years and further closures on the horizon, the Consumer Council is concerned about the level of access that consumers will have in order to carry out daily banking activities in Northern Ireland. The number of branches of big 4 banks have reduced from 252 to 199 (21%) in the last 2 years. This matter affects all consumers, regardless of the bank they use. Rural areas appear to be particularly affected.[13]

14. The Ulster Farmers' Union echoed the CCNI and considered that the farming community would be particularly hard hit by the closure of rural branches for two reasons:

    First, there is a loss of understanding of the business ... For a bank to understand a business, it needs to understand the dynamics of agriculture, so it needs to be in that area. One of our biggest problems is the ability of people in a head office in Belfast to understand the dynamics and the long-term investment that farmers make ... The other thing is that the average age of farmers is probably higher than that in many other sectors. Therefore, farmers rely on their local branch as the main point of contact for doing business. We are concerned that the loss of local branches could have the opposite of its intended effect. There could be more reliance on cash transactions, which would expose elderly people who were holding more cash to criminality.[14]

15. In the written submission from IBOA, it was stated that:

    ... Bank of Ireland has committed to close the fewest locations of the four major banking groups. Since the onset of the crisis, it has closed nine offices and sub-offices in Northern Ireland. However, although it may maintain a presence on most of its existing sites, the Bank's "new branch model" is built on customers accessing services through a battery of electronic devices (monitors, ATMs and dedicated phone lines linked to a call centre) rather than by face-to-face interaction with bank workers.[15]

16. In July 2014, Ulster Bank announced the closure of five branches in Northern Ireland, two within Belfast itself and a further three within a 10 mile radius of Belfast. They also announced the closure of six branches and three sub-branches in the Republic of Ireland.[16]

17. Maintaining a branch network at the current level will always be a challenge for the banking sector in Northern Ireland, and the viability, or otherwise, of each individual branch or sub-branch has received much closer attention in recent years as a result of the unsatisfactory trading performance of each of the banks.

18. As in Great Britain, advancement in the area of IT has also meant a greater use of Internet banking and a reduction in the footfall at branch level. This will continue to be an issue and whether, or not, other providers, for example, the Post Office,[17] will fill the gap left in the market will be watched with interest over the coming years.

19. Branch closure is not, of course, unique to Northern Ireland, but it is a matter of particular concern to us. We regret that Northern Ireland's Banks have shown such little thought towards its customers by seeking to either concentrate its branches in the major centres of population, or to close branches in favour of online banking, although the Post Office, for example, may be able to fill in some of the gaps in the market.

Banks as an aid to economic recovery

20. When considering the banking structure in Northern Ireland, a fundamental question that has to be asked is whether the economic recovery in Northern Ireland is being encouraged, and suitably served, by the banking structure currently available to the Northern Ireland customer base. When the CBI NI appeared before the Committee on 20 November 2013, its Chairman appeared to have little doubt that the banks were not playing their part, stating;

    ... when I became Chairman nearly two years ago, the biggest risk factor and the key blocker to the Northern Irish economy was to my mind our banking situation. I do not think that has changed; it remains the biggest single risk factor and the single biggest blocker to growth in Northern Ireland today.[18]

21. When the Committee took evidence from the four main Northern Ireland banks, we offered them the opportunity to respond to the critical view that had been expressed by the CBI. Bank of Ireland said that:

    It is our view … that we have sufficient capital and liquidity to support lending into the Northern Ireland region … Our view is … that the biggest issue facing the economy is a lack of demand for credit, rather than supply.[19]

22. Danske Bank's response was that their understanding was that:

    the risk factor for future growth is the fact we have legacy debt problems … which may constrain the ability of a large part of our SME sector to borrow and grow in a healthy way.[20]

Danske agreed with the Committee's suggestion that the CBI's criticism was not so much aimed at individual banks, but reflected the realisation that the banking problems, particularly those that were property-related, would have an impact on business confidence.[21]

23. Ulster Bank said that it had been supporting sectors such as agriculture, food, services and natural energy, which had been doing well. However, "we still have the property issue to deal with, but in terms of the fundamental economy, we have been supporting those areas that are the backbone of Northern Ireland."[22]

24. First Trust Bank stated that its approach was about engaging with customers when they get into difficulty as they wanted "to protect jobs and we want to put businesses on a firm, commercial, but, most importantly, sustainable path for the future."[23]

The Tomlinson report

25. In November 2013 Lawrence Tomlinson, the Entrepreneur in Residence at the Department for Business, Innovation and Skills, published his report on banks' lending practices.[24] The report focussed on the evidence he received about the Royal Bank of Scotland's (RBS') turnaround division, the Global Restructuring Group (GRG). He was concerned by what he saw as patterns of behaviour leading to the "destruction" of good and viable UK businesses, and called for further investigation into this behaviour by the appropriate authorities and immediate action to stop such treatment of businesses.

26. The report suggested that there were occasions when RBS engineered a business into default in order to move the business out of local management and into GRG. This then generated revenue for the bank through fees, increased margins and the purchase of devalued assets by their property division. Once in GRG, according to the report, the business was then trapped with no ability to move or opportunity to trade out of the position.

27. As Ulster Bank is part of RBS we were, naturally, very interested to hear whether any of the accusations made against RBS were also being levelled against Ulster Bank. Simon Hamilton MLA, who had replaced Sammy Wilson MP as the Minister of Finance and Personnel, told us that there was no hard evidence that Ulster Bank was behaving in a similar way; if there were any accusations, then:

    … it would be anecdotal evidence. My Department and, indeed, the Enterprise Minister's Department would regularly be contacted by businesses who would be reporting what, on the face of it, would appear to be sharp practice on the part of not just Ulster Bank but all banks. Indeed, we would have some anecdotal evidence of some of the issues that were revealed in Lawrence Tomlinson's report happening in Northern Ireland as well … Nothing has come across my desk in the last couple of days, but my colleagues in DETI have had a few more companies come forward as a result of the news to say, "This, or something similar, has happened to me as well." The answer is we do not have any hard evidence of it …[25]

28. When we took evidence at Stormont from the Chairpersons of the Northern Ireland Assembly's Committees for Finance and Personnel and for Enterprise, Trade and Investment, reference was made to the Tomlinson report and we were told by Daithí McKay MLA, Chairperson of the Committee for Finance and Personnel, that two case studies in particular:

    … highlighted viable businesses and individuals with assets that were not having existing loans renewed but instead were getting increased interest rates and increased fees-so, banks were, effectively, engineering a default, as Tomlinson stated, and acquiring readily available assets.[26]

29. Responding to the points raised in the Tomlinson report, Ulster Bank stated that when his report came out "to the best of our knowledge there were no cases, or he {Mr Tomlinson] had not engaged with Ulster Bank at all in terms of the process".[27]

30. In January 2014, RBS appointed Clifford Chance LLP to undertake an independent review of the central allegation made in the Tomlinson report that the bank was guilty of systematically setting out to defraud its small business customers. Clifford Chance, however, concluded that there was no evidence to support the allegations.[28] In May 2014, Ulster Bank responded to allegations made in a BBC television programme, Spotlight, that it had forced viable businesses into bankruptcy, by saying the Bank found "the airing of these allegations troubling given the independent report by Clifford Chance, which found no evidence to support the most serious allegations made by Tomlinson or any other evidence of misconduct."[29]

31. Whilst the Tomlinson report may have uncovered some disturbing facts about banking in the UK, it was most unsatisfactory that Ulster Bank were not given the opportunity to comment. However, Ulster Bank were given the opportunity to put its side of the story by responding to the Spotlight allegations, but refused to do so, stating their concern over the possible legal implications on commenting publicly on one particular case which was the subject of court action.

32. Whilst we accept that customer confidentiality is uppermost in any bank's decision whether, or not, to respond to media articles or items, we believe that the Bank could have responded without going into specifics. The fact that Ulster Bank refused to take part in the Spotlight programme and, instead, simply rehearse its own commissioned report, could not fail to give the impression that the Bank may have had something to hide.

3   HM Treasury, Rebalancing the Northern Ireland economy, March 2011 Back

4   Q841 Back

5   Before November 2012, Northern Bank. Back

6   Formerly known as the Irish Bank Officials' Association. Back

7   IBOA The Finance Union (BNI0015) para 3.2 Back

8   Q39 Back

9   The Post Office Limited (BNI0013)  Back

10   The Post Office Limited (BNI0013) para 3.1 Back

11   BBC News, 'Ulster Bank to close 39 branches as hundreds of jobs cut', 3 July 2013 Back

12   BBC News, 'Ulster Bank to close 39 branches as hundreds of jobs cut', 3 July 2013 Back

13   Consumer Council Northern Ireland (BNI0019) para 24 Back

14   Q443 Back

15   IBOA The Finance Union (BNI0015) para 2.10 Back

16   BBC News, 'Ulster Bank to close five branches in NI', 1 July 2014 Back

17   The Post Office Limited (BNI0013) Back

18   Q264 [Mr Coulter] Back

19   Q516 Back

20   Q559 Back

21   Q560 Back

22   Q669 Back

23   Q749 Back

24   Lawrence Tomlinson, 'Banks' Lending Practices: Treatment of Businesses in Distress', November 2013 Back

25   Q327 Back

26   Q415 [Mr McKay] Back

27   Q694 Back

28   Clifford Chance LLP, Independent Review Of The Central Allegation Made By Dr Lawrence Tomlinson In Banks' Lending Practices: Treatment Of Businesses In Distress, 11 April 2014 Back

29   Belfast Telegraph, 'Ulster Bank: We never preyed on struggling businesses', 15 May 2014 Back

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Prepared 16 March 2015