KA Regional Bank’s need to open a new branch overseas to support its wide customer base has thrown in a few viable financial centers around the world into consideration. In this paper, I have chosen to open a branch in Europe because there will be a domino effect of foreign banks and insurance and investment institution leaving London, one of the biggest, if not the biggest financial hub in Europe as a consequence of the result of the recent Brexit vote. Cities in Europe such as Paris, Frankfurt, Zurich, Dublin and the state of Luxembourg are looking to benefit their respective countries’ economies from foreign investment and in this paper, I highlight Dublin as the biggest potential beneficiary of foreign companies seeking a new center of operation. Government involvement, economic impact, social and cultural factors and challenges will also be discussed.
Challenges in this new environment
The economic recession of 2008 to 2010 hit Ireland just as hard as it did most countries, bursting the bubble of credit and house pricing, leaving the public with a 64b Euro bill after a botched attempt to fill the subsequent capital hole, meaning that public funding was cut by the government, also and in turn meaning that the expansion of public infrastructure stalled, such that there has been an acute shortage of housing. With the increasing population, higher rates of rent and the lack of adequate transport facilities are the initial challenges the bank is going to experience in searching for a suitable location. While these are also challenges being faced in other financial hubs like Frankfurt, this is a global phenomenon that naturally impacts all kinds of businesses moving to major metropolises. (Robert McHugh, Business World, Nov. 2015).
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Cultural, Ethnic, Social and Educational Characteristics
Ireland is an English speaking country whose population traditionally identify themselves from the counties they come from and they are a foreigner-friendly, social people who have strong family values. The Irish are considered to have a more ‘relaxed’ way of life as compared to the citizens of any other Western European country and thusly, see work as a ‘necessary evil’. However, they are good at being flexible and are masters of improvisation when it comes to short term dealing. The country in general has a great literacy profile with 98% of all of its adults being educated. This is courtesy of the National Development Plan (NDP), where importance is attached to the combination of educational ability with the identification of skills needs in the industry. ICT knowledge is particularly highly emphasized since it is a major component in modern business.(Businessculture.org/Ireland, n.d).
Political, Legal and Economic Systems
The economy in Ireland can be described as a modern, trade and industry based economy. It has two financial sectors; the domestic and international finance sector. The international financial sector was incepted in the late 80’s and performs far better than the domestic sector in terms of funds under administration and capital outlay. The domestic financial sector is gradually recovering from the effects of the economic downturn and another phase of growth is beginning from the worst years of the aftermath, experienced in between 2009 and 2012. According to a special report published in the Irish Financial Times by Vincent Boland in January 2017, the crisis era regime could end this year if the domestic Irish Allied Banks are reprivatized as planned. The Anglo Irish Bank, which was the hardest hit by the crisis, is now in liquidation and the country’s leading bank, the Bank of Ireland, will start paying dividends to shareholders very soon. Boland adds that according to the Irish Funds Industry Association (IFIA), the value of funds under administration in the international sector rose from 1.4 trillion Euros to 3.6 trillion last October.
Ireland is a strong member of the EU ever since 1973 and with the Euro as the national currency, there are no foreign exchange controls restricting the movement of currency in or out of the country. Residents and non-residents can use any kind of global currency to bank inland and can use offshore accounts as well. The government restricts no capital importation to the Republic of Ireland. (HSBC Global Connections,2012). Ireland has a personal income tax top tax rate of 41% and a very attractive 12.5% corporate tax rate that lures businesses to the Dublin International Finance Services Center(IFSC), the capital of funds administration and other offshore businesses. In addition, the government has several double-taxation treaty agreements with other countries. Local and foreign companies also do not have to be physically located at the IFSC to be included for special taxation privileges but can be distributed across Ireland. (Financial Times, n.d). Ireland is part of the free trade agreements of the European Union and a bloc known as the European Free Trade Association (EFTA), while being a World Trade Organization (WTO) member as well. The Irish government is currently involved as part of the EU bloc to negotiate the Trans-Atlantic Trade and Investment Partnership(TTIP) deal with the US and Ireland stands to be one of the biggest beneficiaries of this deal. This deal will help create thousands of job opportunities and exchange of billions of Euros into European and US economies. Furthermore, in the recent past, US direct investment stock in Ireland has accounted for 20% of all investment stock in Europe. (European Commission, Representation in Ireland,2017). The government is well placed to serve the needs of the bank and its customers with such a conducive economic climate.
Regional Integration Efforts
While housed in a country which is a member of the EU, the bank’s involvement in trading will be very flexible in and around other EU affiliated nations in the practice of helping customers with business expansions of their own. This is because as a single market, goods, services and movement of people is not costly because of the added advantage of use of a common currency. Employees and customers do not need a visa or work permit when relocating to other EU countries. So that makes Ireland an ideal location through its regional integration efforts, and also for being physically in close proximity with London and the nation’s English speaking population. Although in recent times there has been accusations that Ireland undercuts other jurisdictions when it comes to corporate tax and more so with ‘sweetheart deals’ with US companies, there is a global tax review planned on corporations to avoid negative effects on the national tax bases by alleged tax avoidance schemes. This is a financial risk worth taking as stated earlier, Ireland expects an influx of financial firms with the government reporting that they have received about 35 concrete enquiries from reputable firms wanting to set base in Ireland (John O’Donnell and Padraic Halpin, Reuters, Feb 2017).
Financial Strategy
A suitable financing strategy for the bank is by hedging foreign exchange. Hedging foreign exchange takes care of factors such as dealing with a client who uses in this case non EU currency. The risk factor of fluctuating exchange rates is mitigated if the bank sets its own and if a period of time will separate incoming outlays and the subsequent payments. One instrument to use is by using forward contracts. Forward contracts can be used by clients to buy foreign exchange currency at a future time and at a given rate of exchange. All these are mentioned in the contract and the rate will not change regardless of the market exchange rate at time of payment. In this way, the bank’s cash flows are easily controlled.
Flexible forward transactions can also be used, which is a slight variation to the forward contracts in that the client can settle the transaction at any time before maturity of the contract. Although the exact moment of incoming payments cannot be determined, the final volume of income can be projected.
The bank and the clients can also initiate the use of FX Options. The client pays a premium amount and has a right but no moral imperative to purchase or put on sale a definite amount at the exchange rate previously agreed upon. This helps the bank to establish the budget in a financial year with the level of the exchange rate as a yardstick. Contracts can also be dropped and favorable market exchange rates taken advantage of at a particular time. The CALL and PUT options gives buyers the right and not the moral imperative to purchase and sell respectively a definite amount of currency at a rate established previously in exchange of the cost of the said option(premium).(Bancspot,2016).
Inflation, Interest Rates and Effect on Operations
Through a statement published on the Irish Government’s State Department’s Office of Investment Affairs, Foreign Direct Investment is actively encouraged in that it has fueled rapid economic growth since the 90’s. The government has also insisted that foreign companies be actively involved in Research and Development (R&D) practices and to procure high quality products and rendered services. US companies have been integral to the Irish economy’s growth in the past quarter century, with approximately 700 subsidiaries employing roughly 140,000 people and giving support services to another 250,000. US firms have many activities ranging from production of high-technology computer devices, medical equipment, computer products and pharmaceutical goods to giving services such as banking, retailing and finance. The attracting power of US companies that have been in Ireland for a while creates somewhat of a cluster effect which bodes well for KA Regional Bank. There are very few glaring trade restrictions other than the small matter of firms incorporating into Ireland have to be tax resident because previously firms would set up operation in Ireland and be tax-resident in other countries and would use a configuration commonly referred to as ‘Double Irish’ to bring down tax liabilities.
Interest rates and inflation are at record lows in Ireland (less than 2%). European Interest rates have been at an all-time low since 2009 when the ECB cut its benchmark rate. Interest rates are likely to go up if there is a growth in the European economy. At the moment, businesses have no pricing power so they can’t push up their prices. This is bad for lower risk investors and good for investors in equity, commodities and property which the bank expects to be dealing with. Low interest rates encourage consumers to spend more thus stimulating an economy, while large asset firms can borrow more and invest it in business operations. (Louise McBride, Business Personal Finance, 2015).
In conclusion, locating a subsidiary of KA Regional Bank in Ireland will be lucrative in the long term considering the factors mentioned in this paper and given that the future projections of the economy by experts all point to a growth fueled economy. In late 2013, Ireland became the first Eurozone country to abandon the ECB, EU and IMF (Troika) bailout program in which acquiescence with Troika’s terms had come with a stagnating GDP and high unemployment numbers to recover with now an economic growth of 7.8%. Unemployment numbers are falling steadfast and with the government’s and EU’s support, there are high expectations for the future of foreign investment.
References
Bancpost, (2016), Instruments for Hedging against Exchange Rate Risk. Retrieved from https://www.bancpost.ro/Corporate-Banking/Global-markets/Instruments-for-hedging-against-the-exchange-rate-risk
Boland, V, Financial Times (Jan. 2016), Dublin Aims to revive ‘Fair City’ status. Retrieved from https://www.ft.com/content/d8e2025c-a405-11e5-873f-68411a84f346
Business Culture (n.d), Irish Business Culture, Retrieved from http://businessculture.org/northern-europe/ireland/
European Commission, Representation in Ireland (Feb 2017), The Trans-Atlantic Trade and Investment Partnership. Retrieved from
http://ec.europa.eu/ireland/news/key-eu-policy-areas/ttip_en
Export.gov (n.d), Ireland-Openness to and Restriction to Foreign Investment, Retrieved from https://www.export.gov/article?id=Ireland-Openness-to-and-Restriction-on-Foreign-Investment
Louise McBride, Business Personal Finance, (April 2015). Could this run of record low interest rates run until 2020? Retrieved from
http://www.independent.ie/business/personal-finance/could-this-run-of-record-low-interest-rates-last-until-2020-31153373.html
O’ Donnell, J, Halpin,P, Reuters (Aug 2016), London Financial Groups Open Line to Dublin After Brexit. Retrieved from
http://uk.reuters.com/article/uk-britain-eu-ireland-idUKKCN1151R6
Robert McHugh, Business World (Nov 2015), Ireland’s Economy Faces ‘Problems of Success’. Retrieved from
https://www.businessworld.ie/economy/Ireland-s-economy-faces-problems-of-success-561556.html
