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

3  A need for more competition in the banking sector?

Competition and Markets Authority findings

33. When considering whether extra competition in the banking sector might be beneficial to Northern Ireland, it could, perhaps, be argued that additional competition would merely just divide up the market place in a different manner. Any new player would have to have the capability of establishing a branch network similar to Northern Ireland's current "big four" or major GB banks with a presence in Northern Ireland, such as Santander, HSBC or Barclays. Indeed, more banks could lead to Northern Ireland becoming "over banked", with an ever increasing number of banks scrambling for a slice of a finite market, ultimately leading to some banks simply not being viable in Northern Ireland.

34. However, the argument for greater competition was put strongly in two reports released by the Competition and Markets Authority (CMA) in July 2014, following a joint project between the CMA and the Financial Conduct Authority (FCA) which concluded, inter alia, that "barriers to entry and expansion for newer and smaller banks remain significant and the markets remain concentrated, particularly in Scotland and Northern Ireland".[30]

35. In its report Banking services to small and medium-sized businesses,[31] the CMA states that in Northern Ireland, there are two large and two mid-sized market participants. In 2012, Danske Bank and Ulster Bank together accounted for 63 per cent of the liquidity management services (i.e. business current accounts (BCAs) and overdrafts) market, whilst First Trust and Bank of Ireland had market shares of 14 per cent and 13 per cent, respectively.

36. The Herfindahl-Hirschman Index (HHI) is a measure of market concentration taking account of the differences in the sizes of market participants, as well as their number. The CMA regards any market with an HHI exceeding 1,000 as concentrated, whilst those exceeding 2,000 are regarded as highly concentrated. The HHI for the Northern Ireland market in 2012 was 2,454, which was a slight decrease in the market concentration level from 2,646 in 1999, but was still indicative of a highly concentrated market. CMA's evidence showed that the market shares of the major banks in Northern Ireland, despite some limited fluctuations, have remained relatively stable over the past eight years.

37. For business loans, the four largest providers had a market share of some 90 per cent with Danske, Ulster Bank and First Trust each having a market share of over 23 per cent.

38. The CMA also drew attention to the Business Banking Insight website which showed sole trader BCA satisfaction scores for the four largest banks in Northern Ireland as: Danske Bank 70 per cent; Bank of Ireland 60 per cent; Ulster Bank 56 per cent; and First Trust 41 per cent. This compared with a score of 77 per cent for Santander.

39. Despite the relatively low customer satisfaction scores, the CMA noted that the banks with the highest market shares had barely lost market share over time. This was not what might be expected in a competitive market, and supported the CMA findings about the "stickiness" of customers, whereby they did not change banks for various reasons, the most common of which was a perception that "all banks are the same". In its report Personal current accounts Market study update,[32] the CMA also found that personal account customers were similarly "sticky" when it came to changing banks.

Equity finance

40. There may, however, be opportunities for specialist finance operators to provide support through their current GB structure. Equity finance, such as raising capital through the sale of shares in an enterprise, might be one area where a more specialist approach would be helpful in aiding economic growth although, as Kate Barker, the Chair of the Economic Advisory Group, told us:

    … of course, banking is not the only source of finance; there is very clear evidence that equity finance is more difficult to get hold of in Northern Ireland, but also that firms are sometimes more reluctant to draw it down.[33]

The Government's view

41. In its memorandum, HM Government stated that:

    The Government wants to see greater competition in the banking sector, with more banks challenging the large incumbents. If communities or entrepreneurs want to set up a bank, either to serve their local community or to compete nationally, and can do this responsibly, Government or regulators should not be an obstacle to this.[34]

42. When the Financial Secretary gave evidence, he referred to Northern Ireland's top five banks (the "big four" plus Santander) and said that "it looks like a bank sector that has a good degree of competition", but thought it could benefit from more.[35]

43. We are concerned about an over-concentration in the NI banking market; whilst we would welcome any new entrants to the market, we consider the way forward is for existing banks to improve their services to their customers without, however, a return to previous aggressive lending practices.

30   "Personal current accounts and small business banking not working well for customers", Competition and Markets Authority press release, 18 July 2014 Back

31   Competition and Markets Authority, 'Banking services to small and medium-sized businesses', July 2014 Back

32   Competition and Markets Authority, 'Personal current accounts: Market study update', 18 July 2014 Back

33   Q362 Back

34   HM Government (BNI0027) Back

35   Q858 Back

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Prepared 16 March 2015