Welcome to Banking News, the KPMG Ireland Quarterly Banking Newsletter, which has been designed to bring together useful insights and developments that are relevant to the banking and capital markets industry. 

Economic outlook

The ECB has taken the decision to raise interest rates by 0.5%, the first such increase in over a decade and in doing so ending a period of negative rates. This is a larger increase than the ECB signposted previously with the more significant increase coming as a result of an "updated assessment of inflation risks" as well the support provided by the "Transmission Protection Mechanism" (TPI). The TPI bond purchase scheme is a new mechanism that aims to ensure that the spread in borrowing costs is kept to a minimum across all euro area countries. 

The Central Bank's latest quarterly bulletin (Q3 2022), suggests there is weakening activity in some parts of the economy, tempering a strong post-pandemic recovery. This has been attributed to the ongoing effects of the war in Ukraine, high inflation and reducing consumer and business confidence. However, despite this, GDP is still forecast to grow by 9.1% in 2022 before falling back to 4.8% and 4.4% in 2023 and 2024 respectively.

The latest data from the CSO property price index indicates that Irish house prices are now 14.4% higher versus 2021 (May 2022 data). The increase has been most pronounced outside of Dublin with prices increasing by 21.5% in the South-East and 20.4% in the border region. However, a report from the Society of Chartered Surveyors of Ireland suggests that price inflation may fall over the next year to 4% as a result of increased supply and rising interest rates. 

Despite some obvious economic headwinds, the ESRI, in its quarterly economic commentary, is predicting that unemployment will fall to 4.3% by the Q4 2022 and average 5% for the year. Furthermore, wages are expected to grow by 3.5% in 2022 and 4.5% in 2023. However, given the pace of inflation, on a real basis, wage rates are set to decline in 2022.

KPMG updates

KPMG recently published Banking thought leadership, focused on the Individual Accountability Framework (IAF), Fitness and Probity and Minimum Competency Code, distributed ledger technology, ESG, fintech and others. Published in this quarter from KPMG International are several benchmarking and trends thought leadership. Follow the below links to understand what this means for your organisation:

Central Bank of Ireland news

Banking CEO roundtable

The Central Bank of Ireland welcomed a statement from the Banking and Payments Federation Ireland (BPFI) following the latest CEO roundtable meeting, at which the retail banks set out the programme of work being undertaken by the sector to manage the migration of personal and business bank accounts for Ulster Bank and KBC customers. The work outlined focuses on the four areas identified for further work at the initial meeting on 17 May:

  • Better planning
  • Customer-focused arrangements
  • Proactive communications
  • System wide engagement

IMF’s assessment of Ireland's financial sector

The Central Bank of Ireland welcomes the publication of the International Monetary Fund’s (IMF) Financial Sector Stability Assessment (FSSA) for Ireland. This report has been published following completion of the IMF’s review under its Financial Sector Assessment Program (FSAP).

The IMF concluded that “Ireland has considerably strengthened financial sector regulation and supervision since the 2016 FSAP”, noting that this “is evidenced by a successful navigation through the challenges of Brexit, the pandemic, and now the war in Ukraine”.

The IMF also highlighted that an increasingly large, complex and rapidly evolving financial system in Ireland raises new challenges for the future, while pointing to the importance of fully addressing legacy issues from the financial crisis. In that context, the IMF made a number of targeted policy recommendations to the Irish authorities, including the Central Bank. These insights are timely as the Central Bank implements its new Strategy.

CBI highlights recurring AML issues with VASP spplications

On 11 July 2022, the Central Bank published its latest Anti-Money Laundering Bulletin, where it noted "significant and widespread weaknesses in the proposed risk and control frameworks of the vast majority of (VASP) applicants", with a number of those weaknesses recurring across a number of applicants.

The Central Bank supervises Virtual Asset Service Providers (VASPs) from an AML/CFT perspective. The press release laid out a comprehensive list of the Bank’s expectations for VASP AML/CFT applications and warned that failure to meet said expectations would likely result in an application being refused.

Digital banks gain traction

Research from Okta, the cloud software provider, indicates that Irish consumers are more willing to embrace digital banking versus their European peers with  40% of Irish survey respondents indicating that they hold an account with a digital challenger bank.

This figure rises to 50% for those in the 18-29 cohort, more than double the figure of other European countries surveyed. This research comes as the Irish Banking Culture Board (IBCB) found that the traditional Irish banks are struggling to gain the trust of their customers, with the banking sector receiving a net score of minus 25 in a survey carried out this year.

Revolut announced in June that it has more than doubled its Irish customer base to 2 million in the space of two years. The neobank has also launched a new ‘buy now, pay later’ feature for Irish customers, allowing them to spread the cost of purchases across 3 monthly instalments. They have also announced a move into in-person payment solution with the launch of the Revolut Reader, which will allow merchants to accept payment anywhere.

Synch Payments, which has been hailed as the Irish banks’ response to the rise of Revolut, has appointed Italian paytech company Nexi to be its platform and service provider. Synch is a joint venture between AIB, Bank of Ireland, KBC and Permanent TSB. The multi-bank payments app is expected to be called Yippay.

Dutch neobank Bunq has launched an Irish IBAN which allows its Irish customer base to set up direct debits, make payments and have their salaries paid directly into their accounts. Customers in Ireland were previously only able to open a Bunq account with a Dutch IBAN.

Starling Bank has decided to withdraw its application for a banking licence  from the Central Bank of Ireland with the digital player concluding that “market conditions and the bank’s own expansion plans mean that securing an Irish banking licence is no longer a top priority”.

Meanwhile the digital-only player has decided to enter the UK mortgage market via an acquisition of a £500m loan book from the specialist lender, Masthaven, markling a significant milestone for the inevitable shift of Digital Banks into secured lending. How long before banks and non-traditional lenders in the Irish market are competing for mortgage market share with a Digital Bank?

Operational resilience activity in Ireland & UK banking market

Strengthening resilience throughout the financial system is one of the strategic commitments by the Central Bank of Ireland (CBI). The Cross Industry Guidance on Operational Resilience (released December 2021) aims to understand different views from stakeholders on how to prepare for, respond to, recover, and learn from an operational disruption that impacts a firms’ ability to deliver a critical or important business service and applies to all regulated firms e.g., insurance, credit institutions, investment firms, RCFs, and PIs.

A timeline has been put in place and firms will need to be able to evidence actions/plans to apply the guidance within 2 years of its being issued (December 2023). This makes the next 12 - 18 months critical for regulated entities to put structures in place to be able to identify and remediate vulnerabilities by appropriately prioritising decision making.

Mirroring the Irish market, we are seeing extensive operational resilience activity in the UK. The Bank of England recently urged investment banks to get a grip on operational resilience. In a pointed speech, the BOE’s regulatory technology and international supervision boss Nat Benjamin urged boards to “make sure they understand the risks from new technology and that operational resilience becomes part of the fabric of their decision making”.

The speech to UK Finance is the latest in a steady drumbeat of exhortations from the central bank about operational resilience, as the financial climate shifts away from a generation of easy money and into choppier economic waters. 

UK Regulators have proposed new standards for monitoring services provided by critical third parties (CTP) to strengthen operational resilience in the UK financial services space. Under the Finance Services and Markets bill, the Bank of England, Financial Conduct Authority, and Prudential Regulation Authority will be granted statutory powers, including enforcement powers, to supervise CTP services in financial markets.

How KPMG can help

KPMG has a large team of professionals with extensive knowledge and expertise in Financial Services, Banking, Aviation Finance, Insurance and Asset Management. KPMG Ireland can leverage a network of multidisciplinary professionals, stretching across Europe and beyond. Supported by this global network, KPMG Ireland can provide a broad range of support, advice and guidance on how to address the challenges you face.

If you have any queries on the topics covered in this issue of Banking News, please contact Owen Lewis, Head of Banking and Capital Markets. We'd be delighted to hear from you.

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