Today was billed as a major speech on banking reform with the aim to increase competition. There are a complex set of issues here and remember what happened the last time there was a big wave of competition in retail banking: Northern Rock and Bank of Scotland sought to expand aggressively and pursued a competitive strategy that was high risk. In the end they had to be bailed out by the taxpayer.
There will be ways to create sustainable competition in banking but expecting the Competition and Markets Authority to create those conditions in just 6 months, as Ed Miliband promised today, isn’t likely to provide a solid start. An activist state shouldn’t be an impatient state.
Miliband’s focus in defining competition was questionable too: the numbers of branches. The Labour Leader’s proposal is that existing banks will be forced to sell branches to create two new banks. He didn’t engage with the issue – it was an incredibly brief speech in the end – that Lloyd’s and RBS have already been told to sell branches and the challenge is finding a buyer.
The big story about branches is that they are declining in importance. Numbers have reduced 40% in the last 30 years and are forecast to go down further. The real consequence of forcing current banks into selling branches may be that – without willing buyers in the market – they will have to close them instead.
A new model of banking?
A different mode of increased competition in banking may be via new technology. PayPal now handles payments equivalent to half the volume of the global giant Citi. And Zopa, a new peer to peer network, has already brought together lenders and borrowers in a volume equivalent to a top ten building society. The uncertainty for these new entrants is how they will be treated by the regulator as they increase in size.
The history of retail banking suggests that in time the current big players will incorporate many of the innovations. That will spread the benefits of the new developments but diminish competition again.
In the end the big question may be whether we want strong banks (which by definition have a large market share) ring-fenced from their investment arms (already planned) or if we value competition more and hence are willing to take some risks and perhaps allow some regulatory freedom to new entrants.
These are the issues that Labour will have to think further about and which today’s speech offered no view on.