City & Business: BarcNatWest would be good for UK Plc

Now the dust has settled on the Martin Taylor tornado at Barclays and Derek Wanless has proved he's in recovery with a buoyant set of results at NatWest, the time has come for the two banks to merge, or, at least, for them to have the chance to merge if their shareholders wish it.

BarcNatWest - still capitalised at something less than the pounds 80bn level of Bank of America and Citigroup - would help UK banking hold its own against US, euroland, and Swiss mega-competitors. Contrary to the big- is-bad instincts of public and government, big in this case would not only be good, it would also not be bad. A merger need not deprive anyone of credit.

Take the Footsie 100 company sector of the economy first. Shell, Unilever, and BT have no worries about BarcNatWest. For one thing, they would remain bigger than the merged bank in terms of market capitalisation. The Footsie 100's access to capital is probably better today than at any point in history.

Aside from Barclays, NatWest, Bank of America, and UBS falling over each other to win their business, Footsie 100 companies can tap stock and bond markets. They can do this in pounds, dollars, yen, or euros, and then swap the proceeds for fixed or floating-rate money in whatever currency they desire.

Alternatively, many are in a position to fund themselves internally. BP Amoco's chief executive, Sir John Browne, did not make his name in Nigeria or the North Sea. He made it in the City as head of British Petroleum's financial arm.

Now take consumers. Ten years ago, individual bank customers had four English high-street banks, two Scottish ones, and post-adolescent managers in local branches acting like dukes and duchesses.

Today individual bank customers have the high-street banks and former building societies from which to choose more accommodating managers. There is more junk post cross-selling insurance schemes. But the breadth and depth of financial services at the consumer's fingertips is great and growing. Soon there will be bank accounts automatically moving excess funds into investment accounts. Already there are specialist mortgage banks undercutting the traditional mortgage lenders. The same holds true for specialist credit-card operations.

So now we come to the part of the banking business cited by those opposed to BarcNatWest - the small business sector. Merged as they stand, Barclays and NatWest would control more than half this sector. This would give them a monopoly.

In recent years, the small business loan market has been a cash cow for banks. Small business balance sheets have been strong due to the growing economy. Therefore, the risk of bad loans has been small. Meanwhile, banks have been able to get funds cheap in global markets, then lend them on to agricultural implement retailers and local department stores at substantial mark-ups.

The fear is that, with the economic slowdown, this is changing. The fear is that BarcNatWest would come into existence just as it decided it didn't want to lend to small businesses because it was too risky. The further fear is that in any economic rebound BarcNatWest would use its monopoly power to gouge small businessmen.

These fears, however, are unjustified. They rest on two assumptions: first, that policymakers have no power to offset these circumstances and, second, that the banking market is static. Neither is true.

The Government could impose minimum small business lending limits on BarcNatWest as a condition of its merger. Better, it could insist that BarcNatWest spin off its small business loan unit, and assume that there would be institutions in the fluid financial services domain that would see this spin-off as an opportunity.

Better still, the Government could use a merger between Barclays and NatWest to create what academics call "narrow banks" - banks with charters to do narrowly defined kinds of business on terms, including tax breaks, that make marginally profitable business more attractive.