Fixing a hole


 Andrew Lilico suggests six reforms for the banking sector over at ConHome, including one which might resonate with most people in the UK:

6. There must be more competition in the bank sector, with greater ease of new entry. An integral part of new entry is that other players must be able to go bust. Otherwise a new entrant that is successful will tend undermine one of its competitors, that competitor will become distressed, the government will then bail it out, and so now the industry has one too many players for the long term, with the likely consequence being that the new entrant also becomes distressed – as a consequence of government support for its rival. No banking sector can be properly competitive without the possibility of firms going bust. It absolutely must not be the aspiration of policy that every bank should be so heavily capitalised that there is no chance it will ever go bust - the basic thrust of the banking regulation agenda of 2009-10. That is a deeply anti-competitive concept.

Britain’s retail banks can be awful. I haven’t met anybody who doesn’t agree. What other sector could afford the rigid opening times, awkward bureaucracy and outright amateurishness that we see in banks? (On the last point, I am thinking particularly of my bank’s habit of phoning me up unsolicitedly and demanding that I prove who I am, but you will surely have plenty of other cases.) Service in the banking sector is sometimes so bad that most banks are more like government bureaus than competitive private businesses, and Andrew’s point above underlines why. The government’s protection of established banks from failure means that they can operate as an effective cartel, safe from the new market entrants that usually prevent cartels from surviving.

Andrew’s other proposals are also interesting, although I disagree on a few points. Still, it’s good to see a realistic, thoughtful approach to the banking sector that aims to minimize the state’s role in the system.