The essential nature of NAMA has been decided. The details have yet to be filled in. For purposes of this article, I’m assuming that it will work; that it will re-introduce a semblance of normality into the business of banking and into the Irish economy generally. It seems to me that much thought must be given to the post-NAMA structure as soon as this “normality” is achieved.

Looking at the post-NAMA situation from the perspective of August 2009, it appears that the Irish banking market will be much more concentrated on the two major players, Bank of Ireland and AIB. Foreign-owned banks will likely have reduced their footprint in Ireland following their experiences of 2008/9. Anglo-Irish Bank will not be a significant player. And whether the remaining financial institutions double or halve in size will not much affect the overall situation.

Concentration of banking at this level creates an unacceptable systemic risk, not just to the banks, but to the national economy. Dominant banks are too dangerous to be allow to continue in existence. Experience of 2008/9 shows that prudential regulation cannot and will not guarantee stability. Concentration also reduces competition to an unacceptable level.

When I started my banking career, back in 1964, there were 9 high-street banks in Ireland. They were small, tightly focussed, easily managed institutions. In their 1964 format, they could not service the needs of a 21st-century economy. But they could have evolved into a dynamic, competitive industry. Above all, they were safe, in the sense that even a total meltdown of a bank would not have a catastrophic effect on the national economy.

1966 changed all of that. The takeover of the National Bank by Bank of Ireland triggered a series of events which led to the current banking structure. The conventional wisdom since then has been that in banking, big is beautiful. It has been argued that size gives financial power in terms of sourcing funds; that size also confers economies of scale. I could devote a dozen blogs to the validity of those arguments – but will keep that for future blogs.

If we want to get back to a situation of lower dominance in banking, then large banks must be broken up. Shades of the anti-trust policy in the US in the early part of the 20th century.

How could a break-up be done? To understand how a break-up might be done, one must understand the nature of banks. Each bank has a core banking business, and some near standalone subsidiaries such as insurance companies. The core banking business is a matrix organisation, with a traditional hierarchical structure and a web of structures which operate across the hierarchy.

If banks are to be broken up to reduce risk and improve competition, then the break-up must occur in all dimensions – geographic, market sectors (corporate, SME, personal), products. Such a break-up would require radical legislation. Since the introduction of the draft NAMA legislation, we should no longer underestimate the power of the state to introduce radical legislation.

For purposes of illustration, my suggested outcome for such break-up would be:-
 Each major bank would be broken into 3 independent banks.
 Certain central departments, notably computer services, should be set up as stand-alone service providers with guaranteed contracts for a (short) interim period
 Branch networks of each bank would be split into 3 groups, each one forming the core of a new smaller bank:-
o The head-office branches (College Green/Dame St) of each bank would become stand-alone banks
o Other branch networks would be split into two banks, geographically, attempting where possible to split each city and county
 Corporate departments, who are responsible for the management of massive lending portfolios would be split, with each corporate customer having the option to choose his preferred bank.
 Many specialist units must be split so that each bank can be independent – clearing, treasury, etc
 Other units can have shared ownership – for example, credit card companies, insurance companies, foreign subsidiaries, etc.

From the point of view of shareholders, current shareholders of Bank of Ireland/AIB would get shares in the new banks in proportion to their holdings.

Finally, there comes the question of naming the new banks. My vote goes towards re-introducing the old bank names which disappeared in the 1960s. The Bank of Ireland would be reformed as the National Bank, the Hibernian Bank and the Bank of Ireland, while AIB would reform as the Munster & Leinster Bank, Provincial Bank and Royal Bank