Sir Brian's retail behemoth moves a step closer

"What emerges is a very different sort of bank from the others, offering everything from traditional retail banking through insurance and mortgages to Peps and other personal saving plans"

For Sir Brian Pitman, chief executive of Lloyds Bank, this may be a case of third time lucky. First he was thwarted over Standard Chartered, then stymied on Midland. Eventually there was the consolation prize of the Cheltenham and Gloucester building society, but for Sir Brian, this was never going to be anything more than an hors d'oeuvre. With the TSB now being garnished for the main course, Sir Brian may be able to end his career on a high note after all. Unlike Midland, this is a deal that doesn't look like being whipped away from him before he can eat.

On the face of it, the takeover by Lloyds of another major high street bank involving thousands of job losses, is as clear a case for reference to the Monopolies and Mergers Commission as you could get. A number of things have changed since Sir Brian's abortive tilt at Midland, however. For a start, the market has become more competitive and fragmented. Furthermore, the Government is now more sympathetic to the case for consolidating mergers, even those involving very substantial job losses, than it was. Brewing, defence, media, the utilities, investment banking, there is scarcely a sector that hasn't escaped some kind of action; the Government has tailored its mergers policy to accommodate it.

Though this takeover will make Lloyds into Britain's largest bank in terms of employees, branches and market value, it will not involve the same dominant position in key market segments that went with Midland. The banking leviathan that emerges is a rather more acceptable one. The amount of rationalisation involved is not as radical, nor will the emergent beast be so self-evidently the anti-competitive force that the Midland one would have been. TSB is strong in Scotland and the North; Lloyds in the South. The geographical fit is better, and the consequent branch closure programme less severe.

Even so, Lloyds cannot expect an entirely free ride. The job losses and branch closures are bad enough and while most people in business understand what Sir Brian means when he talks about chronic over-capacity in high street banking, politically it is hard to sell an efficiency driven deal such as this one at a time when banks are enjoying record profits. Sir Brian always argues a powerful case, but you have to wonder whether the idea behind a takeover that transforms Lloyds into Britain's most powerful high street bank is really as much about serving the customer as is pretended.

But let's give Lloyds the benefit of the doubt. Certainly what emerges is a very different sort of bank from the others, one that begins to resemble the retail financial services giant that Sir Brian dreams of creating, offering everything from traditional retail banking through insurance and mortgages to Peps and other personal saving plans.

It is no coincidence that the TSB too was looking for a building society takeover. The merged bank will have a 10 per cent share of the mortgage market, dramatically distinguishing it from other clearers.

Even the TSB's investment banking operation, Hill Samuel, neatly fits Sir Brian's strategy,with its strong bias towards private client business. Who would have guessed that such a disastrous and expensive diversification as Hill Samuel could have ended up suiting anyone's purpose, let alone that of one so fundamentally averse to the risks and culture of investment banking as Sir Brian Pitman?

For shareholders in TSB, this is probably a fate as reasonable as could have been hoped for given the bank's abominable record since privatisation in 1986. TSB was a unique animal, a bank that owned itself, so when it was sold to investors, all the proceeds went into its own coffers.

The result was a squandering of inheritance of almost heroic proportions. Hill Samuel and its ill-fated attempt to expand into the corporate lending market was only the tip of the iceberg. The fact that shareholders are showing a profit at all is testimony only to the extent of the original privatisation giveaway.

Despite these failings, the TSB remains fundamentally a sound bank with an information technology setup in credit cards, credit control and telephone banking that Lloyds can usefully apply elsewhere. Assuming Lloyds is allowed to proceed, the TSB should ultimately prove a far more appropriate and profitable consolidation than Midland was ever likely to be.

Don't blame the gnomes of London

By jacking up interest rates, the Banque de France has bought time for the embattled French franc. But it seems highly likely that those shadowy "gnomes of London" will be back in force before long. It always makes good copy to knock the speculators, as Prime Minister Alain Juppe did over the weekend, but more often than not there is reason to their nefarious activities. The franc is under attack because there is a fundamental clash of objectives at the heart of economic policy in France.

During the election campaign, Jacques Chirac made a reduction in unemployment his chief priority. The government is committed to creating 700,000 new jobs by the end of next year. The social problems that led to this pledge are as pressing as ever. Last week,Yves Galland, the industry minister, said that if something were not done about unemployment and poverty, France could face an upheaval similar to the May 1968 riots.

Tackling unemployment requires long-term measures to deal with its structural causes - like excessive employer social security costs and a minimum wage that is set too high, particularly for young people. But in the short- term, the best cure for unemployment is an economy that is rattling along.

When output was growing at about 4 per cent at the end of last year, the jobless count was falling. Now that the economy is growing at about 2.5 per cent, the fall in unemployment has stalled. Furthermore, growth is expected to slacken still further in the next few months. With the end of the temporary stimulus of measures introduced by Edouard Balladur, the former prime minister, to help car sales, consumer spending is likely to start falling off once more.

The sharp deceleration in the French economy is mainly because monetary policy is too tight. With inflation at 2 per cent, real interest rates are now over 5 per cent - and this in an economy that is only in its second year of recovery.

What the gnomes of London are telling Alain Juppe and Jean-Claude Trichet, the governor of the French central bank, is that they need to cut interest rates rather than raise them. That easing of monetary policy makes all the more sense in the light of the proposed tightening of fiscal policy as part of the French government's attempts to meet the Maastricht convergence criteria.

Blaming the speculators is like blaming the messenger. Better to read the message, take stock and change policy to one that makes sense. Defending the franc at present levels is a no-win game.

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