Banking profits to be at heart of inquiry

News Analysis: Launch of Cruickshank's review sends shares into sharp reverse
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The Independent Online
DON CRUICKSHANK, the former telecommunications regulator, yesterday sought to play down fears of an onslaught against banking profits as he formally kicked off the government's inquiry into the banking sector.

Mr Cruickshank, who was chosen by the Chancellor, Gordon Brown, last November to head the review, said yesterday that the aim of the inquiry was not to "bash the banks" but to see whether more competition was needed to improve levels of efficiency and innovation, both within the sector and in the economy generally.

"The review will not consider a windfall tax," he said. "It is an opportunity for them [the banks] to make their case as well as for others to complain."

Despite the reassuring words, the launch prompted City dealers to mark banking shares down 1.5 per cent. British banks are currently by far the most profitable in Europe and the degree to which those profits are accumulated at customers' expense lies at the heart of the inquiry.

The Government, Mr Cruickshank said, had posed the question, "How we can raise the long-term systemic growth rate to the rates of our competitor economies? The question for the review is how the banking sector is doing its part in shifting that growth rate."

The review, whose conclusions will be published before the end of the year, will focus on three main areas:

n money transmission, the core of the banking system;

n the credit card merchant acquiring services (the area of the credit card business that services retailers);

n lending, with a particular emphasis on small and medium-sized businesses.

Mr Cruickshank has specifically excluded the large corporate lending market, and insurance, both areas in which he believes there is enough competition.

He also plans to address broader issues, including whether anything can be done about so-called "credit crunches" - the tendency of banks to draw in their horns in times of economic downturn - and the impact of the euro. He will consider whether Britain's being outside monetary union will deny consumers the benefits of greater competition, and whether it will damage the competitiveness of UK banking system overall.

Lastly, he will look at the impact of tax breaks. Generally, he said, he believed there should be little room for government, pointing out that the Government was in the midst of a massive overhaul in financial services regulation generally.

Mr Cruickshank yesterday distanced himself from those in the small business and consumer lobby who have long complained about the behaviour of the banks. For those who were looking for a "more frontal attack" on traditional gripes such as overcharging and not understanding small business, he admitted "this may seem like a dull document".

Blaming British bankers for the failure of British entrepreneurialism is an age-old British parlour game. James Dyson, investor of the bagless vacuum cleaner, is just the latest successful British inventor to claim that he was cold-shouldered by the banks when he needed them most.

In the 1960s, against a similar background of complaints about banks' alleged failure to do enough to promote growth, the Labour government of the time, under Harold Wilson, launched a Royal Commission into the City. After much expensive deliberation among the great and the good, it concluded that there was little fundamentally wrong.

John Harrison, who heads the banking practice at the consultancy arm of Deloitte & Touche, says that every study he has ever read concludes: there is no shortage of capital in Britain, the problem is the lack of decent propositions in which to invest. "It is more of a cultural thing," he says, "the Americans have a more can-do mentality."

But the City has reason to fear. The banks continually point to their relative success, but studies show that British banks could have much to learn in terms of delivering to their customers from rivals in Europe as well as the US.

Angus Hilsop, banking partner at the consultants PricewaterhouseCoopers, says the sniggers that mention of Deutsche Bank or Credit Lyonnais provokes in banking circles here may be misplaced. "I know that view is widely held in the City. But it is out of date. British banks look good on a few narrow criteria, but in broader efficiency terms you get a very different picture."

British banks fare best on return on equity and on cost-income ratios (the proportion of earnings that are consumed by overheads), both measures favoured by investment bankers. But that could just as well mean that British banks are less efficient but can charge higher margins than rivals abroad.

The track record of British banks on innovation, particularly technological innovation, is patchy at best. "The core banking system is 20 years old," says John Harrison, head of the banking practice at Deloitte & Touche's consultancy arm. Britain badly lags many parts of Europe, and even the Middle East and Asia, in terms of electronic banking, for both retail and corporate business.

Other countries are already well ahead in cashlesss and paperless banking systems, and in the use of smart cards and electronic point-of-sale technology. In areas where British banks were pioneers, such as telephone banking, other countries are fast catching up.

France and Belgium are already ahead of the UK in terms of percentage of retail customers using telephone banking. By next year, the proportions will be broadly similar across the board.Whether these failings are due to a lack of competition is a moot point.

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