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EDITION 2 NOVEMBER 2005

From Macro to Micro


Depfa’s Journey

INSIDE

Banking Change International The Role of Pricing


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

2-4 Newsdesk ABOUT BANKING


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

President: Diarmuid Bradley


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

16-17 International Financial Services in Ireland: Editor


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

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

Printing
22-24 Securing the Future Hudson Killeen

of Covered Bonds Cover Image


Paul O’Connor Courtesy of Tom McEnaney
NEWSDESK

Ireland needs to build on


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

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


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

The central theme of the Global Finance Conference,


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

Meade outlines vision for


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

Pictured at the Complaints Handling Seminar: clockwise from top:


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

2 ABOUT BANKING
Banks and consumers jointly IBF supports NALA financial
press for ban on card surcharges literacy campaign
The Irish Bankers Federation (IBF) and Consumers’ The National Adult Literacy Agency (NALA) launched
Association of Ireland (CAI) have jointly called for a a three-year campaign in 2004 to tackle financial
Government review of card surcharges, which are imposed literacy, which research suggests is a significant barrier
on payments made by consumers using credit or debit to people accessing financial services. To support this
(Laser) cards. campaign, the Irish Bankers Federation (IBF) has donated
educational resources to promote financial literacy and
The IBF and CAI believe that surcharging should be foster an early understanding of money, saving and
abolished, or at least more closely controlled, because it is an sensible money management.
additional and unfair cost on consumers who pay by card -
a cost estimated to be in the millions of euro each year. These resources, which were originally designed for use in
Also, it reduces consumer choice by discouraging consumers schools, will be adapted for use with adults with literacy
from paying by card. Support for this campaign is being and numeracy difficulties.
sought of other key parties, including the Financial Regulator
and the Office of the Director of Consumer Affairs. Speaking about receiving the Money Go Round packs from
IBF, Tommy Byrne, PRO with the National Adult Literacy
“Banks here are concerned that surcharges on card payments Agency (NALA), said “NALA are delighted to receive this
may become even more widespread. We believe that the tuition and learning resource on behalf of the thousands
only effective solution lies in national legislation to specifically of adult literacy practitioners who will use it to support the
disallow surcharging”, said Diarmuid Bradley, IBF President. family literacy development work”.
Describing surcharges as “regressive”, CAI’s Dermott Jewell is
adamant that they must be resisted and outlawed.

Diarmuid Bradley, President, IBF and Dermott Jewell, Chief Executive, NALA Public Relations Officer Tommy Byrne receives donated educational
Consumers’ Association of Ireland (CAI) join forces to fight card surcharges. resources from IBF Public Affairs Officer Deirdre Casey.

IMC engages Commission on


mortgage market integration
The Irish Mortgage Council (IMC), which is affiliated to the
Irish Bankers Federation, is working closely with its member
institutions to develop a detailed response to the European
Commission’s consultative Green Paper on European Mortgage
Market Integration.

Harsha Shewaram, National Expert, Retail Financial Services


& Payment Systems in the Commission’s Internal Market and
Harsha Shewaram, Internal Market and Services DG, European Commission
Services Directorate General met with the Council of the
with IMC’s Chairman, Aidan Clarke and Secretary, Eimer O’Rourke. IMC at its recent meeting to discuss the current stage of the
Commission’s consultative process.

ABOUT BANKING 3
service providers, all offering significantly increased competition
Delivering what and choice. Not surprisingly, a survey last year by Amárach
consumers want Consulting confirmed that transaction charges for business
banking in this market are considerably lower than in the UK.
This edition of About Banking includes some forthright views The planned introduction of an IBF Business Switching Code
from one of our key stakeholders, the Consumers’ Association will act as a further spur to competition. A Project Manager and
of Ireland. It is important that we listen at all times to the views Working Group are already in place and consultation with the
of our stakeholders, obtain their insights into the challenges various business representative interests has commenced, all
facing our industry and commit to change where we recognise with a view to having an agreed Code by the end of this year
its inherent validity and necessity. and full implementation by the middle of 2006.

This approach has served us well in recent times as we have Since our last edition we have seen publication of the
promoted important pro-consumer initiatives in a sector that Competition Authority’s study of the sector. We welcome
is delivering increased choice for consumers. The competitive publication because, while we have been proactive in delivering
landscape for banking here has been transformed in recent on a number of initiatives to enhance competition, other
years and we now need an appropriate light touch regulatory developments have inevitably had to await the final report.
framework to allow the full benefits of this to accrue A substantial body of work has already been completed by
to consumers. the sector aimed directly at removing any perceived obstacles
to increased competition in both the personal and business
Consumers can look back over the last few years and find many banking markets. IBF Personal Switching Code launched earlier
things to be critical of in our sector but equally recognise many this year has considerably raised awareness in this area with
more positive developments which have delivered significant some 10,000 customers having already switched using
gains. Customers now benefit from increased choice and access the Code.
coupled with good and fair value as independently measured
against our European and global peers. Bread and butter items None of this reflects any complacency within the sector
such as personal current account transaction banking and regarding our current state. We clearly recognise that being
mortgages are just two examples of where the sector offers true to our mission statement - to foster the development of
excellent value. a dynamic, innovative and stable banking and financial services
industry which contributes to the economic and social wellbeing
Maintaining competitiveness is the key driver of of the country - calls for a journey, not an event;
success for businesses in this economy. It’s important an inclusive rather than an exclusive view of the
therefore that banking plays its part in supporting world. Perhaps, most importantly of all, it’s a call
and enabling that success. We now have more to action which demands a real commitment to
than 10 business banking providers of core services change; change that is already well underway.
in this market together with additional specialist

Pat Farrell,
IBF Chief Executive

Future of the IFSC


Elsewhere in this edition we have an interview with Gerhard reminder that we now need fresh thinking and renewed
Bruckermann, CEO of Depfa Bank, headquartered in Dublin commitment by all stakeholders to ensure continued success
since 2002. As one of the leading global providers of financial in bringing the centre to the next stage of development.
services to public sector clients, Depfa is part and parcel of the The review of strategy for the development of international
success story of international banking in the IFSC which now financial services recently initiated by Dermot McCarthy,
plays host to 25 of the world’s top global banks. The IFSC has Secretary General, Department of An Taoiseach, is most
been an outstanding success in the relatively short time since welcome. Following through on this important step, we now
its establishment in 1987. need early agreement on the way forward, clear accountability
for delivery and built-in measures of success - all vital to the
The original IFSC tax regime which underpinned much of the effective delivery of the new strategy.
early success expires this year. This event serves as a timely

4 ABOUT BANKING
Banking Change and
Consumer Expectations
Dermott Jewell, Chief Executive, Consumers’ Association of Ireland

Change, almost without exception, monoliths that had posed as their


meets resistance. ‘If it’s not broken, opinionated protector.
don’t fix it’ invariably comes hot
on the heels of an announced Competition
decision for change. And this is The first sign of change now is one of
closely followed by the reality that attitude. The sector has gone into a
those who uttered this advice have serious damage limitation and correction
now been ‘dragged kicking and mode and is trying hard to manage the
screaming’ into the now - the future. unforgivable. No tears - but there has
been apology, handholding and the
This is how the majority of promise of more change. Those days,
consumers view the banking industry, they assure us, of oversights, glitches,
and that is the nice version! computer errors, mistakes, technical
faults, serious lack of communication,
Trust, respect and support have been an internal failure or the result of an
withdrawn by those consumers who unfortunate series of events - are over!
have been made, through years of
entrenched immobility, to suffer a The kicking and screaming part now
serious lack of competition, the absence comes mostly due to the emergence of
of choice, and the consequences that long elusive element of competition
of a loss of values and ethics. More I referred to earlier. The Danes are
importantly, and the one which many invading again and, through their
will never forgive, they were submitted acquisition of National Irish Bank (NIB),
to the ultimate abuse - overcharging to are promising aggressive campaigning
their personal loss and the gain of not and value to woo new customers.
one but a number of these financial Bank of Scotland (Ireland) already has

6 ABOUT BANKING
“The CAI and the IBF have lobbied jointly before and will do so again.
This, I believe, indicates perhaps one of the most important
elements of change that has come about.”

a strong consumer goodwill factor and The CAI and the IBF have lobbied most significant of long overdue changes
will undoubtedly receive attention to jointly before and will do so again. recently introduced into the Irish banking
their offers as soon as they convert their This, I believe, indicates perhaps one system - the facility, thanks to the IBF
former ESB branch network. Add to of the most important elements of the Personal Switching Code, to switch
this the new RaboDirect offers and the change that has come about. This is personal bank accounts with a limited
permanent tsb move to get in the game because we can see in it a willingness delay, red tape or cost for the ‘switcher’.
with a challenging ‘free banking’ slap and determination to restore some of This is hugely significant because it
in the face to the existing NIB offer and the quality of the appreciation of the allows the market to really work and
we are starting to see the marketing customer that was lost. It also begins to lifts old and deeply- set barriers to
techniques actually beginning to re-establish some of the quality that has competition that had dissuaded so many
emerge that are geared to deliver long been eroded over the years of change, for so long. This has not so much been a
awaited benefits to customers - not just closures, overcharging and denial. case of biting the bullet but rather a very
shareholders. Clearly, one of the most unique form of disarmament.
intense signs of a change of direction Of course, that said, the business of
is the reduction by Bank of Ireland of banking goes on. If consumers fail to So, we see the way clear for new
almost 20% of its workforce. With real make their payments due to oversight, entrants, new products, transparency
change clearly demanded, the level of error or internal failure they will continue within charging structures and the
screaming from here is deafening. to be ‘strongly urged to rectify the possibility for real value and innovation
matter as a matter of urgency’ and also across the spectrum of products and
So, let me strike some more positive advised that ‘penalties will (and shall) service offers. How innovative, how
notes. The moves by some providers apply’. That is fair enough, but the entire transparent, how strong in value and
towards free personal banking are landscape does stand on the brink of how realistic these will be in their level
welcome. They are long overdue because more change. A change of attitude and of charge to the consumer only time
those ‘valued customers’ who have for what will be for many a restoration of the will tell. Suffice it to say that many
years maintained their accounts in credit quality of service but to a very high level are keeping a beady eye on progress
without receipt of any benefit deserve of demand. This level will be compared - especially on the rates and charges.
some reward for letting the banks use against the new entrants who will Innovation also has its potential for
their money. The ‘valued customers’ also undoubtedly raise the bar from the outset problems and the offers of 100%
deserve some significant monetary relief and be poised to raise it even further as mortgages, easy access to credit and debt
or reward due to the fact that they now the competition, expectedly, heats up. management must all, of necessity, form
use their telephones and computers, an integral part of this fast moving factor
at no cost to the bank, for maintaining This ‘quality’ will bring a focus on of change. Otherwise it will be futile.
their accounts. The massive reduction in charges, fees, commissions and
usage of cheques alone provides massive penalties. The ‘value’ to the customer That path of future progress will be
savings in office space and storage and in will be twofold in that consumers will significantly improved if a structure
staff resource costs. look to how much they can save, not of clear and understandable criteria is
simply without incurring any loss of adopted for every customer required to
The move by the Irish Bankers quality of service or outlay, but more operate and move within the banking
Federation (IBF), willingly supported by through continual reward for their system. Consumers have the power to
the Consumers’ Association of Ireland custom and a personal form of attention dictate how rapidly that takes real shape.
(CAI), in lobbying the Minister for to their banking needs. Any marketing However, two considerations need to
Finance to remove the double taxation executive will confirm that retention of a be borne in mind. First, consumers must
of stamp duty on credit and ATM customer is far more economically viable be proactive - having demanded it they
cards on second accounts was a highly than recruitment of one. That form of must avail of the change, use it and
significant one. Specifically so because ‘spend’ - in real terms that actually is mould it into their preferred state. And,
it brought the two bodies together, visible to the customer - is what will lastly, notwithstanding Caveat Emptor,
singularly focused upon removing an dictate the level of change here and the they should always be mindful that,
unfair tax on consumers of the service, initial limit of switching loss or retention. unless they do so, the odds will move
customers of the banks and already against them and dictate that, as far
overcharged citizens of the State - Switching and consumer choice as they are concerned, the house
well, in this area at any rate! This brings me to perhaps one of the always wins!

ABOUT BANKING 7
Delivering a World-Class Electronic
Payments Infrastructure in Ireland
Anindya Roy, Senior Manager, Financial Services, Accenture

access, for whatever reason, to the


Developing our payments system. As Figure 1 shows,
electronic payments the relatively low number of total
infrastructure can help cashless payment instruments per
capita in Ireland (76 per annum),
address some of the compared to the EU average (150 per
strategic challenges annum), reflects relatively high use
of cash payments. Ireland also has
facing the economy, the fourth highest usage of cheque
argues Anindya Roy. payments in the EU.

The key message from the Information Armed robberies of cash-in-transit


Society Commission’s 2003 report, vehicles, for example, have highlighted
“Delivering A World Class Payment the cost to society at large of a
Environment”, is as relevant today as continuing high level of cash payments.
it was two years back. This is that the This is reflected not only in the increased
use of cash and cheque payments in cost to businesses and banks of handling
Ireland remains one of the highest in cash, but also the impact of criminal
Europe and this constitutes a substantial activities on society at large. Conversely,
cost to the Irish economy. In particular, greater adoption of electronic payments
the relatively high prevalence of cash can lead to significant benefits to Irish
payments has been linked to the fact businesses and consumers, not just in
that a sizeable segment of the adult financial terms but also in broader
population in Ireland does not have socio-economic terms.

8 ABOUT BANKING
Lower cost, wider choice, greater Such universal access to the payments In many ways, Ireland is well positioned
social inclusiveness system could therefore help to contribute to become one of the “best practice”
The most obvious financial benefit of to increased social inclusiveness. Also, countries globally in the area of electronic
cashless payments is the cost saving consumers could have more choice and payments. Our demographics - age,
arising from a reduced need to handle convenience in carrying out commercial education, income profile - are highly
cash or process cheque payments. transactions and availing of public service favourable for greater acceptance of
According to the Information Society delivery using electronic channels, such as electronic commerce and increased
Commission report, just these savings, on the internet or mobile phones. sophistication in the use of technology.
a gross basis, could potentially amount Over the last decade, there has been
to between €200 million to €500 million However, all of this can only be significant growth in electronic payment
per annum, or around 0.3% of GNP. achieved through development of volumes and many of the infrastructure
While there are a number of assumptions a world-class electronic payments elements of electronic payments. For
behind these estimates, they clearly show infrastructure which offers inter- example, the number of credit cards has
the very significant potential for savings. operability to payment services more than doubled, while debit cards
A pervasive, multi-channel electronic providers and convenience and choice have grown from zero to over one million
payments environment, enabling quicker to consumers. Such an infrastructure in a relatively short period of time. The
migration from cash and cheque to is, in fact, a critical component of the number of ATMs and merchant point-
electronic payments, could significantly overall technology infrastructure of any of-sale devices in Ireland, on a per capita
reduce the cost of providing electronic country and helps to contribute towards basis, is now comparable to or better
payment products and services and create sustaining economic growth and than many other EU countries including
opportunities for innovation. This would global competitiveness. Sweden, Germany and the Netherlands.
create a “virtuous cycle” that, in the
longer term, would benefit consumers The World Economic Forum, for example,
in many ways. For example, access to measures the development of electronic Alignment of stakeholder interests
cost-efficient banking, and ultimately to payments infrastructure as part of its Sustaining this growth in electronic
a wider range of financial services, could evaluation of the “network readiness” payments into the future and
be provided to traditionally underserved of a country - that is, its technology transforming the electronic payment
segments of the population by leveraging infrastructure and environment, infrastructure in Ireland presents a
a pervasive and low-cost electronic which is a key leading indicator of significant challenge for the many
payments environment. global competitiveness. stakeholders involved, including banks,
businesses, retailers, consumers, transport
operators, telecommunication companies
Figure 1: Use of Cashless Payment Instruments
(Number of transactions per inhabitant) and public sector agencies. Many of
these challenges are of a global nature
Credit Credit & Direct Cheques Card Total and it would be difficult to come up with
transfers debit card debits based
an Ireland-specific solution. In this regard,
payments e-money
there is a lack of clarity around common
Belgium 67 60 19 2.3 10.3 158 standards and inter-operability in many
Denmark 45 105 28 6.8 1.3 186 emerging electronic payments channels
Germany 69 27 64 1.6 0.5 162 such as mobile payments or smart cards.
Greece 1 5 1 2.4 nap 10
Spain 15 27 34 4.3 0.03 80 On the other hand, within Ireland
France 42 71 38 64 0.29 215 there are potential opportunities for
Ireland 10 38 10 18.7 nap 76
the stakeholders to align, integrate
Italy 18 17 12 8.7 neg 56
and/or leverage current and planned
Luxembourg 29 81 11 0.6 6.7 129
broader infrastructure initiatives that
Netherlands 78 74 61 neg 6.7 219
Austria 109 24 80 0.8 2.2 216
could transform the future shape of
Portugal 10 65 14 23.2 0.1 111 electronic payments here. Some of these
Finland 109 106 12 0.2 0.2 227 opportunities lie in the potential synergies
Sweden 48 84 15 0 0 147 between initiatives such as integrated
United Kingdom 37 87 41 37.9 nav 203 public transport ticketing, Chip and PIN
EU 43 49 38 20.2 1.2 150 roll-out of bank cards, use of smart cards
for identity, rollout of broadband internet
Source: European Central Bank, Blue Book Addendum, August 2005
access and of 3G mobile network access.

ABOUT BANKING 9
Delivering a World-Class Electronic Payments Infrastructure in Ireland

“The biggest regulatory challenge in payments for all eurozone


countries over the next few years is to realise the vision of
a Single European Payments Area.”

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

10 ABOUT BANKING
When we met Tom,
he was living in a damp
bedsit with no windows...

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growing on the ceilings and walls.

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was moved to a bright one-bedroom flat at the same rent. He doesn’t know himself now.

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

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

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www.threshold.ie

CALL 01-6707003
From Macro to Micro:
Depfa’s Journey
The state sized bank with a fresh view on development

Gerhard Bruckermann must be a happy man.


The bank of which he is Chairman and
Chief Executive, the IFSC-based Depfa,
has had yet another successful business year.
Yet to perceive the bank as solely a vehicle for
making large profits would be to misconstrue
its unquestionable ethos. Patrick Hughes met
Gerhard Bruckermann to find out more.

Depfa: The Background grew, the bank turned the Irish office
Founded in 1922, Depfa was established into its global headquarters.
by the German government to use long-
term bonds to alleviate pressures in the Microfinance
social housing sector. It was privatised in Compare and contrast. A global
1991, just two years after the fall of the bank engaged in state finance, with
Berlin Wall. not a single account holder. A local
co-operative operation, providing loans
By the time Gerhard Bruckermann of tens of dollars to rice farmers in
was on the board of Depfa, the bank remote Cambodia. The two could not
had widened its gaze to public sector be further apart in conceptual terms,
financing and other countries in the and yet the latter is at the heart of
European Community. It had a particular Depfa’s ethos.
desire to develop business in the English-
speaking world. “We chose to open an “For many years, Depfa didn’t
office in Ireland for simple reasons”, have a formulated policy on social
says Bruckermann, “the language, the responsibility”, explains Gerhard
people, the IT infrastructure and the cost Bruckermann, “though we funded a
of doing business here were paramount, school for the blind in Germany since
especially the low tax regime”. the 1950s, and have been involved in
educational projects like Erasmus and
Originally, the Irish office was established sponsoring initiatives around languages
as a subsidiary to deal with non-German and mathematics - core missions for the
business. As this business grew and bank itself”.

12 ABOUT BANKING
“Microfinance refers to small scale finance which provides loans on
a very local level to economically active people”

ABOUT BANKING 13
From Macro to Micro: Depfa’s Journey

“We can facilitate communities to take an element of their


future back into their own control, and the impact
on societies of that is and will be huge.”

The needs of local farmers in developing regions, and that might be for a variety from moneylenders, who charged
nations are not an expected core of sociological reasons, including that interest rates of between 100 and
constituency for a bank like Depfa. they are seen as being economically 200%. Bruckermann explains “MFIs
“I attended an event that we sponsored more active”. charge a much more reasonable rate
at which Tom Arnold of Concern spoke” of a little over 30%, which fully covers
explains Bruckermann. “I was hugely Depfa’s input to such projects combines all the costs of loan officers travelling
impressed by his message, and decided funding of €50,000 per month with hundreds of miles across inhospitable
to find out if there was anything we other important assets. “This kind of terrain to get to a local community.
could do to help”. finance has nothing to do with Depfa’s Though such a rate might seem high to
business model”, states Bruckermann, Western minds, in these circumstances it
The result? Depfa’s involvement with “but I wanted Depfa people to be really allows MFIs to survive”.
Concern’s microfinance operations in involved in Concern’s projects”. He
Cambodia. “Microfinance refers to himself has recently returned from a trip The relationship between Depfa and
small scale finance”, says Concern’s to Mozambique to see other projects. Concern runs deep. Mr Bruckermann
Chief Executive, Tom Arnold, “which “This is now an integral part of the explains that when he got to know more
provides loans on a very local level to work of the bank, not just in providing about Concern “I could see that, as an
economically active people who wish to financial advice, but also through our NGO, it was fairly non-political, and that
develop a small business or objective to people providing expertise like legal, IT matched with the ethos of the bank.
increase their livelihood options”. and audit services. This is now part of Other NGOs stimulate political debate,
our corporate culture.” and very effectively too, but that is not
Concern was already involved in the stated goal of Concern”.
microfinance institutions (MFIs) before Concern and Depfa are involved in
Depfa’s participation, and Concern still developing nations such as Cambodia
fully owns its microfinance facility. “MFIs and Mozambique. “In Mozambique, Social Responsibility
have a great impact on the communities the population has been utterly Depfa works with almost 6,000 local
where they are available”, says Tom ravaged by HIV/AIDS: facilitating authorities around the world, and its
Arnold. “For example, AMK Cambodia people to develop their own small board system is centred on the CEO. This
grew out of community development businesses is one step in the building means that the bank can make decisions
work, and became fully licensed by the blocks of education that will alleviate quickly, certainly a key to its ongoing
Cambodian Central Bank in 2004”. their situation.” New initiatives are success. And yet it is not well known in
underway in Eritrea and Ethiopia. Ireland.
How Microfinance Works
“Loan officers travel at regular dates to “Such finance initiatives are unlike any Placed against the work with Concern,
communities where Concern offers MFI sense of banking as we know it,” says the billions this bank handles and its
facilities” explains Gerhard Bruckermann, Bruckermann. “They go into areas that international state profile remains
“and they extend small finance to are fairly inaccessible, and where the seemingly incongruous. “Increasingly,
those who present themselves, collect only previous facility was usurers or the expertise of Depfa as a state project-
payments and move on to the next money lenders, charging huge interest funding bank can be brought to bear in
community. AMK, for example, has rates.” Did this previously exacerbate developing nations”, says Bruckermann.
a Board that licenses individual loan problems in those regions? “Without “We are working with the World Bank
officers, who apply well thought out question. MFIs offer a real alternative to to see how we can help to manage
lending criteria. The loan facility itself people, and the beneficial impact that country funds. In projects like this,
is an extremely sophisticated, and I have witnessed in those societies is we can see how our two seemingly
flexible, product”. simply huge.” disconnected worlds merge: we have
expertise in helping governments to
“The debt repayment ratio is much “One of the goals of the MFI is to fund and develop major infrastructure
higher than in Western societies at recover its money, not to make a profit”, initiatives, and in our work with
around 98%. Interestingly, women make says Bruckermann. Previously, the only Concern in developing small initiatives
up around 80% of applicants in some source of funding in such areas was in developing nations. If we put these

14 ABOUT BANKING
two things together, we might be able to controversies: for example, sharing
help such nations at a macro, as well as a
micro level.”
revenue when the project achieves more
than a specified return”. Microfinance
Gerhard Bruckermann and Depfa do not The View from the IFSC in Action
blow their own trumpet about their work Continuing on the theme of success,
under the heading of social responsibility. Bruckermann sees the role of the Two stories of how
“From our work with Concern, we accrue IFSC as being central to the ongoing microfinance has helped
no benefits. However, for our people, socio-economic development of the change lives in Cambodia.
the work really functions at the level of country. “Over the years, the IFSC
a motivational objective, but we’re not has developed into a vibrant business Ith Ya, 40, is widowed and trades
trying to make any PR capital out of this. district in its own right within the city in stone goods in the Banteay
We are extremely lucky, we are at a phase of Dublin through the conglomeration Meanchey province of Cambodia.
in history where we could financially and of offices. It has attracted its own Her shop is located in her village,
technically eradicate absolute poverty. ancillary legal and accounting practices but she also sells her items (including
Of course governments have a genuine and has an important role to play sharpening stones, sculptures,
responsibility, but personally we do too: in the creation of cutting-edge mortars and pestles, and rice mills)
as corporations and individually. Our professional jobs.” in other areas. She began by selling
generation has that responsibility her goods from in front of her house
right now”. It is fair to say that most commentators in 1999 when she received her first
see that the ongoing development of loan from AMK Cambodia. Now she
the IFSC must be continued in a wider has many clients, and hires between
“ I’m very interested context. Bruckermann contributes to 10 and 20 skilled and unskilled
in ensuring the this debate: “I’m happy overall with workers every day. It is a family
governmental policy in the sector, business: her son looks after the
correct balance of but I’m very interested in ensuring workers, while she and her mother
regulation: too much the correct balance of regulation: too take care of trading. In the future,
much stifles growth, too little creates she would like to hire more workers
stifles growth, too a difficult working environment.”And to meet demand.
little creates a difficult moving forward? “The elements that
will continue to drive the growth of
working environment” the IFSC include a general positive
political climate to support business
development, along with the creation
PPPs in Ireland
of an infrastructure that facilitates non-
The experience of Depfa in providing
nationals in areas such as schooling and
public sector finance must also have
housing. Further, a fair and efficient
some relevance closer to home. “The
visa policy is necessary to attract top
scope for Public Private Partnerships
professionals and add to the pool of
(PPPs) in Ireland is huge,” says
expertise in Ireland.” Finally, can the Phuon Siek is 49 and married, and
Bruckermann, “because the high
IFSC stay ahead of the game, should raises livestock in Pursat, Cambodia.
growth rate of this economy is matched
other economies attempt to replicate He trained as a vet, and currently
by a lagging infrastructure. PPPs help
its success? Bruckermann answers that owns 5 cows, 1 ox, 6 buffalo and a
to speed things up hugely in sectors
question with one word: “Flexibility”. pig. He started out by investing his
like health, education and transport.
own savings with a loan from AMK
With careful consideration, there are
to buy three piglets. With the profit,
combinations of public and private
and a further loan, he bought a rice
funding that can produce real results
field and two more piglets. With
for the nation”. In recent times, Ireland
his new profit, and a third loan,
has seen a very public debate on the
he bought a cow. His fourth loan
lasting value of PPPs, particularly with
bought him another piglet and some
the ongoing debate about the Westlink.
fertilizer. In the future he intends
Bruckermann’s view? “A PPP gets an
to rent his cows and buffalo to his
initiative going that wouldn’t otherwise
neighbours.
be budgeted for. The private sector
needs some incentives to be involved.
Adapted with the kind permission
Not every project ends up being as
of Concern.
lucrative as Dublin’s Westlink toll bridge
seems to have been. But there are
methodologies that help avoid such

ABOUT BANKING 15
International Financial Services in Ireland:
The Next Phase of Development
Sean Dorgan, Chief Executive, IDA Ireland

Following years of tremendous growth and success, Ireland’s international financial


services industry now needs to move beyond transaction processing to focus more
on activities that are revenue and profit based, writes Sean Dorgan.

Since the formation of the IFSC in 1987, Ireland’s position opportunity, IDA Ireland commissioned international
in the international financial services industry has consultants, Deloitte, to undertake a study to examine the
undergone a complete transformation, evolving from current position of the industry and to identify areas for
an industry serving local market needs into one of the future development.
world’s leading financial hubs. It has also contributed
to and mirrored Ireland’s economic development, The findings of the Deloitte report, “The Future of the
particularly over the last decade. International Services Sector in Ireland”, identified emerging
global trends in the industry and pointed to key areas of
Dublin is now internationally recognised as a first choice opportunity where leadership could be achieved and key
location for the international financial services industry, competitive advantages could be developed in the future. Areas
ranging from banking and treasury to insurance and funds. highlighted in the report include:
This is largely due to Ireland’s reputation for highly-skilled and • Specialist debt/financing products and securitisation
experienced people, our ‘can do’ business attitude, responsive • Managing global/regional banking products
legislation and flexible, speedy regulatory procedures. • Funds servicing
• Asset Management
Identifying the challenges ahead • Pan European mass risk/retail insurance products
Notwithstanding the success achieved to date (see the side
panel on page 17), the industry in Ireland is constantly Meeting these challenges
facing new challenges. New competitors are emerging, both The industry in Ireland is now at a crossroads. The majority of
from within the EU and worldwide, all eager to replicate the activity, and therefore the employment, is centred around
Ireland’s achievements. The world of financial services is transaction processing. This needs to change if international
changing; there are new pressures on various sectors of financial services are to remain and develop in line with
the industry. We must constantly evolve and build on our Ireland’s ongoing economic growth.
strengths and develop new areas where Ireland can achieve
the lead position. Ireland needs to move from this phase of transaction
processing to one which is revenue generating and profit
IDA Ireland has undertaken several new measures specific motivated. A number of companies have already made this
to the international financial services area to ensure that transition - for example, Merrill Lynch and KBC - and there
Ireland is prepared for the next phase of development in are others whose activities were and are revenue and profit
the industry. IDA Ireland’s International Financial Services based. This basis of operation is not new to Ireland and the
team has been expanded and a renewed emphasis has majority of multinational companies who operate here across
been placed on promoting the new potential business other sectors such as life sciences, ICT, and engineering are
in the industry. In order to examine potential areas of focused on revenue and profits.

16 ABOUT BANKING
In line with this step change in the activity base IDA proposes
that Ireland’s international financial services companies should
become actually involved in creating knowledge within their Making Ireland
companies. Such knowledge will lead to creativity, innovation
and product development. It will help companies to win a Global Player
corporate mandates, deepen relationships with the customer
and increase sales and marketing activity. A good example is The listing of IFSC companies reads like a “who’s
Citigroup, who recently announced the establishment of a who” of top global financial institutions with
Research and Development (R&D) Centre of Excellence at its companies such as Citigroup, State Street, Depfa
Dublin offices in the IFSC. This is the first dedicated R&D Centre Bank, JP Morgan, HSBC, Merrill Lynch, XL, Hartford
established by Citigroup worldwide and the first ever R&D and ABN AMRO managing European and global
investment by a financial services company in Ireland. functions from the IFSC. Dublin is now home to
half of the world’s top fifty banks and one of the
The infrastructure required for this transition is fundamentally main European locations for insurance (both life and
in place. However, step changes always require refinements and general) and an internationally recognised hub for
the international financial services sector is no different. the funds industry. Up to 16,000 professionals work
directly in the industry today, with as many again
As recommended by Deloitte, the education inputs could be employed indirectly in support services (legal, tax,
enhanced by creating a “chair of financial services”, increasing accounting etc.)
the number and scope of academic courses in the areas of risk
management and computational finance together with more Some highlights, which give an idea of the scale of
collaboration with internationally recognised schools. In this operations in the IFSC, are:
regard, the recent development and launch by the Irish Bankers • Bank assets of international banks are now worth over
Federation (IBF) and The Institute of Bankers in Ireland of the €337 billion;
Executive Masters Degree in Risk Management is particularly • Net asset values of domiciled investment funds are
welcome. Now underway in University College Dublin, this MSc €498 billion;
course should help meet the need for more well-qualified risk • Cross-border life assurance premiums are €5.6 billion;
management professionals. • Some €700 million paid by IFSC companies
in corporation tax to the exchequer in 2002, which
It is important that Ireland’s taxation environment is “capital accounted for 15% of the total take for the year.
friendly” and that there is an ongoing development of our
extensive double taxation agreements. Equally, it will be The success of the IFSC has led to the growth of non-
important to ensure sufficient regulatory measures are available regulated financial services activities, expanding into
to support the Financial Regulator’s stated role of facilitating locations nationwide. A key element of IDA’s strategy is
innovation, competitiveness and growth in the sector through to continue to encourage and support the development
effective and responsive regulation. of financial services activities beyond the greater
Dublin area, ensuring Ireland and not the IFSC alone is
A key factor in the success and growth of the IFSC has internationally recognised as a first-class location for the
been the team effort that has gone into achieving this. The industry. A growing number of companies are already
partnerships that have formed over the years between the doing this by adding operations centres and back office
various government departments and agencies, the industry and administrative activities, with strong clusters of
itself and the supporting professional services have been key to these activities being developed in several regional areas
the success story. It is crucial that this cooperation continues as across Ireland.
we move into the next phase of development for the industry.
The year 2005 alone has seen companies such as
The industry in Ireland is reinventing itself at accelerating rates IFS and Bisys expand with new regional operations
and we must work to ensure that Ireland keeps pace with these in Drogheda, Naas and Waterford, while PFPC has
changes in order to maintain our position as a world leading built on its positive experiences in Wexford and
location for the industry at the forefront of developments. is expanding its existing facility and opening a
IDA Ireland will continue to work with companies and new office in Navan. Other companies that have
representative bodies, such as IBF, to ensure that Ireland offers found success outside the IFSC include Sun Life
the most attractive package to the industry in terms of business in Waterford, State Street in Kilkenny, GMAC in
knowledge, skills and responsive legislation. However, we face Mullingar, MBNA in Carrick-on-Shannon, Cigna in
the challenges with confidence that Ireland can continue to Galway and Pramerica and Pacificare in Letterkenny.
meet the needs of the international financial services industry
based on our ongoing success and the responsiveness Ireland
has displayed since 1987.

ABOUT BANKING 17
The Role of Pricing in Retail Banking
in Ireland
Brian Gannon, Head of Financial Services UK and Ireland

also because the charges for services


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

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


global usage profile, 2005 (€)

300

252
250
Annual weighted prices 2005 €

223

200

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

0
Ireland
Germany

Switzerland

Belgium
Spain

China
Norway

Czech Republic

Australia

UK

Netherlands
France

Sweden
Poland

Austria
Canada
Slovakia

Portugal
US
Italy

Source: Capgemini Analysis 2005, World Retail Banking Report 2005

18 ABOUT BANKING
“...as Figure 1 shows, Ireland fared extremely well in its pricing,
coming in as the third lowest pricing regime out of all
the 20 countries surveyed.”

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

ABOUT BANKING 19
The Role of Pricing in Retail Banking in Ireland

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

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
Portugal

Australia

Spain

Ireland
Czech Republic
Poland
China

Switzerland

Austria

Belgium

Sweden
Germany

UK
France

Canada

Norway
Slovakia

US

Netherlands
Italy

Source: Capgemini Analysis 2005, World Retail Banking Report 2005

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

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

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

Help Concern Fight Poverty Today


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CREDIT CARD HOTLINE: 1850 410 510 email: info@concern.net www.concern.net
Place of registration Dublin, Ireland. Registered number 39647. Registered Charity No. CHY5745.
Concern works with the poorest of the poor. Your gift will be used where the need is greatest.
Securing the Future
of Covered Bonds
Paul O’Connor, Head of Prudential Supervision and Risk, Irish Bankers Federation

The interests of Ireland, and a competitive


European Union market, are well served in
new measures adopted at EU level for the
rapidly-developing covered bonds sector,
writes Paul O’Connor.

Rapidly-developing with huge is active in the area of mortgage credit


potential for further growth, the covered bonds.
covered bonds market is now the
second largest bonds market in Covered bonds secured with mortgage
Europe, after government bonds. credit are a major source of funding
New legislation and continuous for the European mortgage market,
product innovation have established which stood at €4.7 trillion at the end
covered bonds as the most of 2004. There is likely to be further
important segment of privately- significant growth in all areas of the
issued bonds on Europe’s capital covered bond market over the coming
markets. With some 23 European years, driven in part by the continued
countries active in this market, expansion of the mortgage market.
the volume of covered bonds
outstanding exceeded €1.6 trillion Already, the mortgage market has
by the end of 2004. expanded at an average annual rate of
over 8% for each of the past ten years,
Ireland enacted legislation enabling the with 9.7% recorded in 2004. In the
issuance of covered bonds in 2001 and enlarged European Union of 25 Member
the first issues took place the following States, the fastest growing national
year. By 2004, Ireland represented markets are the Central and Eastern
almost 5% of the total outstanding European countries. Ireland, Spain and
balances of the larger covered bonds, Greece are the fastest growing markets
called jumbo covered bonds, and amongst the EU15.
accounted for over 12% of new issues
of jumbo covered bonds during that European mortgage debt amounts to
year. Banks such as Depfa Bank and 45% of EU GDP compared with a US
WestLB are highly active in the public figure of 65%. While the two markets
loan covered bond arena through their are not directly comparable, there remains
Irish operations whereas Bank of Ireland significant room for growth in Europe.

22 ABOUT BANKING
Gay Mitchell, TD, MEP, tabled a number of amendments to secure a favourable outcome. © Photo European Parliament

Addressing shortcomings in pool, favouring markets which have a and the Financial Regulator. This was
EU legislation large availability of domestic assets; taken forward at a European level
The European Commission’s Capital through the various industry associations.
Requirements Directive (CRD) defines the • lower limits applying to the These included the European Banking
rules for capital adequacy of banks for substitution of assets within a pool, Federation representing 29 countries
the next generation of banking. This is thereby reducing operational flexibility. and over 4,000 banks, the European
the level of capital required by institutions Assets need to be replaced from time Mortgage Federation representing
to ensure that they maintain the to time as the loans are repaid. This over 75% of the EU mortgage lending
appropriate level of capital to reflect the favoured markets where long-term, industry and the European Covered Bond
risk profile of their assets. This is essential fixed rates are the norm and loans Council (ECBC).
to protect banks from insolvency and to are generally not switched from one
protect their customers’ interests. lender to another; Considerable differences of opinion
existed amongst Member States, ranging
With regard to covered bonds, the CRD • stricter rules on the valuation levels from the extremely conservative through
defines the minimum regulatory capital applying to residential mortgages progressive to wildly ambitious. At each
requirements for covered bonds and whereby only loans of a lower of the industry fora, the Irish position
specifies a range of eligibility criteria loan-to-value (LTV) level could be was presented and a European position
which must be fulfilled if the bond is to included in the pool of assets. For any negotiated which accommodated the
receive capital treatment as a covered marketplace with a rapidly growing views of various Member States, and
bond. A covered bond meeting the property market - such as Ireland, UK, importantly for us, accommodated the
criteria laid out in the CRD can achieve a Spain and the Netherlands - higher Irish national interest. This established
lower risk weighting of 10%. LTVs are commonplace. a clear and unified European position
which was then taken to the Commission,
The original proposal by the Commission The EU legislative process requires Council and Parliament.
contained a number of restrictive consideration by the European Council
measures which would have seriously - representing the relevant government The outcome ultimately proved positive,
reduced the ability of Ireland and other ministries of the 25 Member States - and persuading the Commission and the
EU countries to compete with the parallel consideration by the European Council that the restrictive measures were
traditional providers of covered bonds Parliament and its elected members. A unnecessary. The Council agreement
– Germany, Austria and Denmark. Given negotiated agreement is ultimately put negotiated under the Luxembourg
that all covered bonds issued in Ireland to a final vote in a full plenary session Presidency at the end of June 2005
have achieved an AAA rating from the of Parliament. The Commission remains represented a good outcome.
major rating agencies and that there is influential throughout the process,
no history of default in the EU covered attending all meetings of Council. The consideration by Parliament proved
bond market, these restrictions appeared to be equally challenging, as new
unnecessary and regressive. Promoting Ireland’s interests proposals surfaced including one to
To influence the European agenda, it is remove the full eligibility of EU assets.
The proposal contained three major important to have a European position. EU Member States are governed by
restrictions as follows: In Ireland a national position was common treaty and rules on financial
• less ability to incorporate a broad range developed through dialogue between stability and it is accepted that EU assets
of international (non-EU) assets in a the industry, the Department of Finance carry less risk than non-EU assets.

ABOUT BANKING 23
Securing the Future of Covered Bonds

Eoin Ryan, TD, MEP helped restore key measures required by Ireland. © Photo European Parliament

Further restrictions to international asset This incorporated measures that will What is a covered bond?
eligibility were proposed along with other benefit all European jurisdictions and A covered bond is a bond issued by
measures that would have impacted represents a highly successful outcome. a bank secured by a pool of high
negatively on the ability of Ireland and The final round lay in the closing quality assets on the balance sheet
others to compete successfully in the negotiations between Council and of the issuer. These assets may be
European marketplace. Parliament, which focused on the correct mortgage loans, both residential and
level of the Loss Given Default (LGD) commercial, or alternatively public
Within the European Parliament, both parameter to be applied to covered sector loans.
Gay Mitchell TD, MEP and Eoin Ryan TD, bonds. While highly technical, this
MEP used their positions as members of was very important to the traditional Public sector covered bonds account
the European Committee on Economic and larger players in the marketplace, for over 55% of the total amount of
Affairs (ECON) to alter the course of the especially Germany. Other Member States covered bonds in issue.
debate and restore the key measures were keen to ensure that a level playing
required by Ireland, Luxembourg, field would prevail and a compromise Benefits of covered bonds
France, UK and others. Gay Mitchell led was reached in the lowering of LGD from Covered bonds are a low-risk
the campaign within the EPP political 12.5% to 11.25% for all AAA-rated product and are of major interest to
grouping, the largest in Parliament, to covered bonds. international investors. Key benefits
win the support of members for the Irish for both issuers and investors
position. The debate ultimately went to While much has been achieved at the include the following.
the day of the final ECON committee vote European level, Ireland cannot afford to
in July with an oral amendment tabled stand still. In the past year, there have For issuers
during the vote by Gay Mitchell to secure been many legislative developments • Lower funding costs
the eligibility of international assets. in various Member States - Germany • Flexible alternative to deposits and
and Italy introduced new legislation senior bonds
while Portugal is currently reviewing its • Possibility of extending the
“By 2004, Ireland legislation. The challenge to the Irish maturity profile of banks’ liability
represented almost industry and authorities is to maintain side to make it match with
a competitive level of legislation while mortgage loans maturity
5% of the total preserving the quality of the covered • Generally better returns on
outstanding balances bond product. regulatory capital

of the larger covered As Chairman of the European Covered For investors


bonds…and accounted Bond Council’s CRD group, Paul • Alternative to government bonds
O’Connor has been at the centre of • Secure instrument in case of
for over 12% of representations at EU level on the issuer insolvency
new issues…” covered bonds issue. • High liquidity due to large
issue sizes and market maker
The outcome was the adoption by commitments in the jumbo market
Parliament of the more progressive • Geographic and asset class
approach that had been widely favoured. diversification

24 ABOUT BANKING
The Business
of Law…
As one of Ireland’s leading business law firms
Mason Hayes & Curran is focused on finding
the legal solutions to assist the continued growth
of your business.

In conjunction with this business focused


approach to law we also pride ourselves on
excellent client/lawyer relationships.
We continually strive for world-class client
satisfaction and achieve this through our
straight-talking, solution-driven approach
to complex business issues.

To find out more about how Mason Hayes


& Curran, one of Ireland’s leading and most
progressive law firms, can assist you and your
business, please contact:

Kevin Hoy
+353 1 6145030 khoy@mhc.ie

Fionán Breathnach
+353 1 6145080 fbreathnach@mhc.ie

Dublin: 6 Fitzwilliam Square, Dublin 2, Ireland New York: 261 Madison Avenue, Suite 400, New York, NY 10016, USA
Tel: +353 1 614 5000 E-mail: mail@mhc.ie Tel: +1 212 973 9443 E-mail: mail@mhcny.com

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