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The future of financial services in Ireland Back  
Can Ireland learn to manage its public finances in order to be successful through the full economic development cycle? Can AIB and Bank of Ireland maintain their independence in the face of continued takeover and merger threats? Michael Buckley, head of Ireland's largest bank, AIB, responds.
It took great courage to set up a new financial magazine in 1987. The economic prospects for the country were bleak. The public finances were out of control. The current budget deficit had reached a record 8.5 per cent in 1986 and it took almost 30 per cent of total tax revenue to fund debt. Tax rates were high - the top rate of income tax was 58 per cent, the standard rate of corporation tax was 50 per cent - the low rate was 40 per cent! Capital gains tax was at rates of between 30 to 60 per cent and residential property tax was charged on larger houses.
Efforts to establish the IFSC in the Custom House Docks Area were just beginning. The top 50 companies on the Irish Stock Exchange had a total capitalisation of under ?4 billion. The capitalisation of both AIB and Bank of Ireland was under ?500 million. Their combined profits were less than ?200 million. The European Single Market was a gleam in Jacques Delors eye and the Single Currency seemed light years away. The Berlin Wall would last for another two years. Had anyone heard of the internet? Peace in Northern Ireland seemed as far away as ever.
Looking back over the period, the key drivers of change have been the increasing integration of the EU and developments in technology. The scale and pace of change has been dramatic and has led to a sharp increase in competition in the Irish banking market. It is hard to imagine that it is only ten years since exchange controls were finally abolished. When Peter Sutherland, as AIB chairman, argued in 1993 that Ireland should be among the first wave of seven countries to join EMU, he was regarded as wildly over optimistic. By joining the euro in 1999, Ireland opted for a regime of monetary stability and low interest rates, which we could never achieve on our own. Lower interest rates significantly reduced bank margins but the greater stability also enhanced credit quality.
The creation of a single EU market in financial services has been a major development. A bank authorised in any EU member state is free to provide banking services in any other member state without requiring any additional authorisation. The introduction of the euro also integrated the markets for financial services and increased the transparency of pricing across member states. With technological advances making entry into the Irish banking market much easier, competition has increased.
More than eighty credit institutions now offer banking services in Ireland. Almost sixty of these are incorporated in Ireland, while the remaining institutions are authorised in another EU member state. Of these, eleven have significant involvement in retail banking through branch networks.
More competition means for instance, that Irish bank charges are now substantially lower than is the case in the UK. In one important respect, consumer protection regulation in Ireland is inhibiting normal competitive pricing and transparency. The pricing of paper transactions continues to be well below their economic cost. This perpetuates a degree of cross-subsidisation, retards a rebalancing of fees and charges, contributes to inefficiency, stifles innovation and is neither in the long-term interests of consumers nor financial institutions.
The IFSC has been a major contributor to our strong economic performance. It has generated direct employment of over 8,500 people, significant indirect employment in areas such as accounting, legal, information systems and very substantial corporation tax revenue. Most of all, it was the original flagship of the new Ireland, as a nation with the intellectual capital available to build the most complex services industry capabilities that the modern world can demand.
The growth in technology in financial services improved the efficiency of payments systems. The proportion of automated payments in the personal market has now grown to almost 80 per cent; ironically, it is still only 30 per cent in the business market. As a result, we still lag behind other advanced countries. Online and telephone banking has developed fast, and as part of an integrated branch/online service offering.
In the immediate future we face many changes, driven by demography, which will fundamentally affect the prospects for the Irish financial services industry. More fundamentally, we face two major tests of our maturity as a developed member state of the EU. Firstly, can we truly manage our public finances to be successful through the full economic development cycle? The government must combine spending discipline with a continuing focus on revenue growth and, and at the same time must solve the management issues involved in getting better value for money for each euro of taxpayers’ money spent on the provision of public services. The latter has been a major failure over the past 15 years. Unless we get better value for money, we will never make progress in dealing with our physical and public services infrastructure deficit. The second test will be our ability to create a multi-racial Ireland that truly values diversity, and the associated challenge of becoming a facilitator of, rather than an obstacle to the enlargement of the EU.
Will the two Irish banks still be managed and controlled in Ireland in fifteen years time? That will depend entirely on their performance. Independence has to be earned each year by performance versus peer banks in the EU. Despite our ups and downs, the value of E1,000 invested in AIB in December 1987 would now be E22,838 - this compares to a figure of E9,821 for a similar investment in the banks in the Eurotop 300 index over the same period. I see no reason why our independence cannot be maintained.
Ireland has been transformed over the last fifteen years and Irish business and financial institutions have prospered. I am confident that provided we continue to manage our affairs well, our future is much brighter than anyone could have thought possible in 1987.

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