Who will back the new banks?
The government’s promise of three new banks looks attractive for an industry that has retreated to a Big Four offering little competition. But one of the three newcomers isn’t new and the other two are tiddlers.
Consolidation has certainly reduced choice for both private and corporate bank users. In the 1990s, Halifax, Leeds Permanent, Cheltenham & Gloucester, Birmingham Midshires, TSB, Lloyds and Bank of Scotland were independent and rival lenders; now they are all part of the same group. In that time, RBS bought NatWest and Barclays acquired Woolwich and HSBC tookover Midland.
Santander of Spain entered the UK market but only to buy Abbey National, not to expand the choice, and then gobbled up Alliance & Leicester plus Bradford & Bingley’s savings side. Nationwide remains independent, but the rescuer of default for troubled building societies now has over 50 per cent of that mutual market – which is as unhealthy as the concentration among quoted banks.
Technically the limited ownership is even more limited. One owner (the taxpayer) controls that whole amalgamated Lloyds group, plus RBS, Northern Rock and the Bradford & Bingley assets, but luckily joined up government does not extend to banking and they remain autonomous. It is lack of finance, not lack of competition, that holds them back.
But to claim selling the Northern Rock’s “good bank” creates a new bank is disingenuous. Rock used to be an independent building society, then it was an independent plc, now it is an independent nationalised industry: returning it to the private sector does not add a new bank.
Of the other two promised new banks, their sale is being demanded by the EU competition commissioner so the government has no choice. She has ordered Lloyds to dispose of 200 branches in Scotland plus IF, the internet bank created by Halifax, while RBS must sell 312 branches south of the border (and six Scots NatWest branches). Hardly big stuff compared with Lloyds’ remaining 3,000 branches.
The RBS outlets might be renamed Williams’ & Glyns but their new moniker might be that of the new owner. And the one rule is that the new owner must be an entrant to UK banking. That rules out HSBC, the only UK bank flush with cash, Barclays and Santander.
Whoever buys will need a deep pocket as well as a wish to run branches. Tesco has the cash but surely no wish for a branch network; Virgin Money hasn’t the capital at present. Spain’s BBVA might want to rival Santander over here, but few foreign banks have the resources to expand - and they would still be the tiddler in a UK market dominated by the Big Four – Five if Santander is included.
Maybe the names to watch are Standard Chartered – once blocked from buying RBS - or Prudential, Aviva or overseas insurance companies. It takes a lot of capital to buy a loan book.
Forcing banks to sell into a weak market and excluding the big buyers will produce a well-attended auction. It offers the chance to buy into British banking cheaply but it reduces the chance of the taxpayer recovering its massive investment. That makes it even more important to ensure that banking becomes more competitive after this shake-up.
