The banking sector is a central player in the economy. Not only does it directly account for some 4 per cent of national output, it also has a key influence on the wider economy. It is thus important that it operates in an efficient and competitive fashion and that it earns adequate profits.
The work being undertaken by the Competition Authority in examining the sector is thus important. The authority, following a preliminary investigation, has decided to concentrate its work on examining the provision of current accounts and on lending to small business.
The authority emphasises that because it is confining itself to examining these topics, this does not mean that it has given the banks a "clean bill of health" in other areas. It does seem sensible for the authority to restrict its study, as it is important that it is completed as expeditiously as possible. However other areas - such as the credit card market - might bear future examination.
There is no doubt that Irish banks have a record of strong profitability and that they have earned very significant returns from the Irish market over a prolonged period. In some areas competition has been lacking - for example, in the mortgage market the entry of Bank of Scotland in 1999 was a key factor in creating a more competitive market. Meanwhile the margins between the rates given to savers and those charged to lenders seem very high in some areas. No doubt the Competition Authority will have something to say on all these areas.
Central to its examination of personal banking, for example, will be an analysis of the money transmission mechanism, to see whether this acts to stifle competition. Meanwhile, small businesses have long complained that they are forced to pay excessive interest costs and bank charges. A study by ISME, the lobby group, estimates that this costs small industry some €200 million a year. The banks take issue with such calculations and the outcome of the Competition Authority study will be eagerly awaited by both sides.
The authority's study is important, but it should be seen as part of a wider picture. After all, while it may issue findings and recommendations, it would only have power to act if it found clear evidence of breaches of competition law. It will thus be up to the Government to act on most of its recommendations.
The new financial regulator, IFSRA, also has an important role to play. It is responsible for regulating the sector and is itself studying lending practices in the mortgage market and the record of the banks in passing on interest rate reductions.
Finally, the consumer - whether a business or a personal customer - has a key influence. By shopping around, by questioning charges and interest rates and by moving business when another bank offers a better or cheaper service, consumers can have a significant impact on the competitive environment.