Can you cap the banks? Our writers make the case for and against Labour leader Ed Miliband's plans to limit their market share
Thursday 16 January 2014
It happened with energy prices, and now it's happened with banks. Every time Ed Miliband comes up with a policy that crimps the free market's tendency to behave like a monopoly, big business goes apoplectic and the left wave their Socialist Worker banners in delight.
His plan to limit the market share of UK banks, set to be fleshed out on Friday, created the usual reactions.
Corporate cheerleaders like the former Chancellor Lord Lawson said it was wrong to curb the private sector. That there is already enough competition among the high street banks. Sir Philip Hampton, chairman of the Royal Bank of Scotland (itself, of course, one of the big banks) rather predictably agreed.
However, similar rules to those expected to be proposed by the Labour leader are already in operation in the US, where customer service is said to be good, so we decided to pit our New York correspondent, a lover of the American way, against our UK banking reporter by asking them the question: 'could Ed's plan make Britain better?'.
Mark McSherry: Yes, we should learn from our past mistakes
A bird in the hand is worth two in the bush – that would appear to be the philosophy of many Americans when it comes to dealing with banks.
While millions of consumers in the United States trust their incomes and savings with massive financial institutions, many still prefer to deal with local community banks. Last month the Bank of Bird-in-Hand in rural Pennsylvania, supported by Amish investors, opened its doors, having raised roughly $17m (£10m) in capital and having been approved by regulators that include the United States' Federal Deposit Insurance Corporation.
It was the first new bank to be opened in the United States in almost three years. It made the news.
As a general rule, US banks are not allowed to grow above 10 per cent of nationwide deposits through acquisitions, but are allowed to grow above that level if they do it organically, under their own steam, said Brad Hintz, an analyst at Sanford Bernstein.
"It makes it impossible for the biggest banks to go out and acquire a regional bank and take their market share up dramatically by that," he adds. Wells Fargo, Bank of America and JPMorgan have been able to grow their deposits slightly above 10 per cent organically but consolidation in the US still has a long, long way to go until it gets to the British situation.
Anyone who believes there will not be financial crises in the future is delusional. When the next crisis happens, would it make any sense if a handful of UK banks control three-quarters of Britons' deposits? Of course it wouldn't.
To the big shots in the City of London, it might seem a bit backward for so many tiny community banks to exist in the US. Well, maybe Britain can learn from these people in rural America. And maybe more Brits need to learn the valuable lesson of "once bitten, twice shy".
Nick Goodway: No, they will almost certainly shed the poorest customers
"They would say that, wouldn't they?" is the obvious reaction to the banks' angry response to Labour's plans to force a greater break-up of their market.
Ed Miliband is, quite rightly, attacking an industry which is still widely despised and hated. He is uncertain as to what the market share cap should be or indeed of which market. If, as his advisers have been guiding, he is not looking at 25 per cent, or current accounts, mortgages or branches, it could be only taxpayer-controlled RBS which is actually caught in his net. We'll find out more on Friday, perhaps.
Having more players does not always mean more competition. There have been four big supermarkets in this country for years and there is no shortage of competition between them.
But as Labour finalises its policies it should look out for unintended consequences.
Forcing banks to cap how many customers they can have would almost certainly mean they shed the poorest. That could see Labour actually increase the proportion of "unbankable" consumers, in turn, driving more people into the arms of loan sharks and payday lenders.
Also, privately, bankers say they want fewer branches, not more and are happy to shed bricks and mortar as banking is increasingly done online.
The practical side of selling off branches should not be overlooked either. Both Lloyds and RBS struggled to try to sell their branches as ordered by the EU for receiving state aid. Both ended up with compromise agreements in TSB and Williams & Glyn's. And don't underestimate the biggest glitch factor of any sell-off : the banks' antiquated IT systems.
Finally, banks could simply respond to tough market-share rules by ending their current "free banking, if in credit" current accounts. That hardly looks a vote winner.
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