ONLY RADICAL ACTION CAN BREAK BANK MONOPOLIES / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Only radical action can break bank monopolies


By Diane Coyle and Jonathan Haskel

Published: April 11 2011 15:47

Sir John Vickers’ banking commission presents its interim findings as a happy medium between radical structural reform and substantially higher capital requirements. Unhappily, the success of the banks in their lobbying was all too apparent in the way share prices jumped post-publication. Now, in his final report, Sir John must go much further if Britain is to fix its uncompetitive banking system. If not, and given the clear political influence of the financial sector, an independent Competition Commission inquiry is the only way to achieve the radicalism needed.


Described as “combination of more moderate measures”, the report proposes higher capital ratios, separate subsidiaries for retail arms, and a new divestment of Lloyds-HBOS branches. The need for more capital ought to be uncontroversial after the financial crisis. But the report is dismissive of plans to separate investment and retail banking, asserting that “ring fenced” subsidiaries are a cheaper option. But ring-fencing does nothing to address the instability of our banking monoculture, while work undertaken by Sir John and his team clearly shows that a system of a few large universal banks to be much riskier than one with more diversity.


But it is on banking competition that the current proposals need most work. The integrated structure of the industry presents inherent obstacles to strong competition. In particular, the scale of the incumbents creates an almost insurmountable barrier to new entrants. Not only do big high street banks enjoy a large implicit subsidy from the taxpayer, they also use the cushion provided by inert savings accounts to cross-subsidise the kind of products on which new entrants might try to compete.


Sir John’s report notes there has been essentially no successful new entry on a meaningful scale into UK retail banking for at least a decade. But the evidence is also clear that concentration has given consumers an increasingly bad deal. Kenyans now have more innovative and cheaper ways than Britons to access financial services.


On competition, the report has some perfectly sensible, if modest, suggestions. Sir John proposes easier switching through account number portability, and perhaps easier terms to allow new entrants access to payment systems. It also acknowledges that the Lloyds-HBOS merger was a mistake, as the competition authorities privately pointed out to the Government at the time. However, it claims the deal has gone too far to be reversed, and settles instead for a slightly larger divestment of branches.


Breaking up such a business is clearly not an easy thing to do, and will imposes costs. But the arguments made in Sir John’s report are worryingly reminiscent of those dismissed by the Competition Commission during the break-up of BAA. At that time the airport conglomerate, just like the banks today, was seen as a large and complex business, but one too important to the UK economy to be left in an uncompetitive position.


Thankfully, if Sir John is willing to go further, competition has the power to surprises us. Who would have predicted that a sold-off Gatwick would have coped with December’s snow so much more efficiently than the apparently expert incumbent at Heathrow? The same can be true with banking in the future, if more radical measures are taken.


At present these few institutions are large enough to overwhelm Britain’s economy, and powerful enough to influence its politics. Increased capital requirements will not fix this. Instead, a more sweeping restructuring is needed. Given the ferocity of lobbying against even modest reforms, Chancellor George Osborne and business secretary Vince Cable should now consider alternatives. Taking the decision out of the political process altogether, and handing it to the competition authorities, is the best way forward.


Diane Coyle runs the consultancy Enlightenment Economics. Jonathan Haskel is Professor of Economics at Imperial College Business School. Both were members of the Competition Commission from 2001-2009.


Copyright The Financial Times Limited 2011