The exit of a retail bank from the market in Ireland could contribute to upward pressure on lending interest rates and potentially lead to weaker credit availability, the Central Bank has said.
The regulator said the relatively lower levels of competition in the market here may be a contributing factor to average interest rates for mortgages and small business lending being higher than elsewhere in the euro zone.
The comments were made by Central Bank Deputy Governor Ed Sibley in a letter in response to Sinn Féin finance spokesman Pearse Doherty and seen by RTÉ News.
It followed concerns raised by Mr Doherty with the Central Bank Governor over the impact that the possible withdrawal of Ulster Bank from the Republic of Ireland market might have on competition and consumer protection.
In his response, Mr Sibley said the Central Bank could not disclose details of the specific nature and extent of its engagement with Ulster Bank in relation to the strategic review by its parent Natwest Group.
However Mr Sibley said he could confirm that the Central Bank has "regular and intensive engagement with Ulster Bank on a broad range of matters, including the NatWest Group Strategic Review, and is in contact with the NatWest Group and the UK regulatory authorities, as appropriate."
On the issue of competition, Mr Sibley wrote that competition issues are primarily a matter for the Competition and Consumer Protection Commission.
But he said competitive pressures can have an effect on the financial system and the achievement of the Central Bank's aims, "as can the ability of firms to enter and exit the system in an orderly fashion."
"The Irish retail banking system is concentrated by international standards, with five retail banks accounting for the majority of new mortgage lending, and three retail banks accounting for the majority of new bank lending to SMEs," he said.
"The Central Bank recognises that the relatively lower levels of competition in the Irish retail banking market may be one contributing factor to average interest rates for mortgage and SME lending being higher in Ireland than the Eurozone averages."
"However, price competition is possible even in a concentrated system. The exit of one entity from such a system, all other things equal, could contribute to upward pressure to lending interest rates and potentially lead to weaker credit availability."
Mr Sibley added though that the wider context is one of improving competition in the provision of financial services here.
The Central Bank Deputy Governor also said that in the event that a regulated entity was to withdraw from the market here, it must be undertaken in accordance with legislation as well as the regulator's statutory codes of conduct.
These include notifying the Central Bank immediately of its intention and providing affected consumers with at least two months' notice to enable them to make alternative arrangements.
It must also ensure all outstanding business is properly completed prior to any transfer, merger or cessation of operations.
If a transfer or merger is taking place, then customers must be informed as to how continuity of service will be provided, Mr Sibley added.
Mr Sibley said that if loans are sold or transferred to another regulated entity, protections that were available to borrowers prior to the transaction continue to be in place with the new loan owner.
NatWest Group is continuing to examine its options around the future of Ulster Bank Republic of Ireland, with no timeline disclosed for completion of the review.
In September, the Irish Times reported that among the options that NatWest is considering is a possible wind-down of Ulster Bank's operations here.