The consolidation of the banking system could take up to 10 more years as institutions struggle to shrink their balance sheets and adjust to the realities of a changed market with tougher regulation, according to senior Central Bank sources.
Officials predict that after a decade Ireland will have a largely foreign-owned banking sector, similar in profile to New Zealand's, whose assets and liabilities will be booked to other jurisdictions.
Regulators believe Ireland is still overbanked, despite massive upheaval in the financial system in the last two years which has seen two retail banks close and others reduce their profile. The number and size of banks will have to come down significantly to meet requirements being laid down by policymakers.
Nama and European Central Bank debt-buying programmes have helped Irish banks deleverage, but are still far from the levels banking supervisors want under the new regulatory regime, Central Bank sources said.
Last week the Financial Regulator published a set of new banking supervision policies, outlining the new risk-based approach championed by head of financial regulation Matthew Elderfield. The paper noted that while the "final outline of the post-crisis Irish banking system is unclear", the market was "highly contestable" and "open to low-cost entry".
Speculation about the creation of a so-called "third force" bank has been widespread for more than a year. It is understood Irish Life & Permanent is looking to absorb EBS and Irish Nationwide, the two building societies that failed to complete a merger earlier this year.
Meanwhile nationalised lender Anglo Irish Bank is in negotiations with the European Commission over its plan to split into a viable good bank and bad bank asset run-off vehicle, putting it in a position to merge with a retail-focused institution, such as the putative third-force bank.
Last year RBS-owned Ulster Bank merged with its subsidiary, First Active. Bank of Scotland Ireland is in the process of closing Halifax under orders from its British parent, Lloyds. Postbank is also closing after part-owner BNP Paribas decided to withdraw from the Irish retail market. Analysts have cast doubts on whether Ireland would be better off with a few big banks under the control of foreign owners, however.
"The rising cost of regulation facing banks really requires economies of scale in the market," said Oliver Gilvarry, Dolmen's head of research. "Of course, then you can have the problem of them being too big to fail. But I don't think the government really wants to face into another crisis having to depend only on foreign-owned banks."