New banks


Amazing, isn't it? A year after Gordon Brown forced the merger of Lloyds Bank and HBOS, in order to stem an online run on the latter, now the government is planning to break the banks up again. It could see the return to the High Street of names such as TSB, the old Trustee Savings Bank bought by Lloyds, and Williams & Glyn's, a 1970s name bought up by the Royal Bank of Scotland. Northern Rock, rescued by taxpayers two years ago, will be broken into two.

The episode shows how mixed-up markets become when politicians start interfering. For years, policy has favoured giantism in the banking sector. Then in no time flat, everyone has to restructure again. It's no way to run a railroad: nor a bank, a mail system, a healthcare service, or schools, for that matter. It's only happening because the EU competition commissioner, Neelie Kroes, insists. The Treaty of Rome is a very pro-competition document, after all.

I'm very much in favour of having more, and smaller banks. Our problem has been, and is, the lack of competition in the sector. Banks have merged and grown then merged and grown again. Without competition, the banks have been able to drift into risky forms of business that their customers don't want, and to pay themselves huge salaries and bonuses for not very much useful public service. They've become so big that government cannot possibly let them fail, lest the entire monopoly financial edifice comes tumbling down.

But what has made the banks so big and bloated? Regulation is the answer. Lots and lots of it. Regulators crawl over every aspect of a bank's operation, right down to how quickly they answer the phone. It costs a fortune. You cannot run a bank without hiring a huge compliance team to keep you within in the rules. So smaller banks cannot survive, and have to merge to create bigger banks. Bigger, less competitive, more profligate banks. Yes, this is entirely a problem of government's own making. And if the government is being forced to break up the banks, it should lighten the regulatory burden on them at the same time. Otherwise, they will not survive.