Challenger banks


I am glad the idea of more banking competition is now popular with Labour as well as with the Coalition and the Vickers Report.

Our current problems in banking emerge of course from the previous Labour government which aided and abetted the reduction of competition on a large scale. Before the crisis they allowed or even encouraged the acquisition of many banking assets and businesses by RBS, creating a bank which turned out to be too big and too badly run to succeed. During the crisis they added to the mistake by encouraging and allowing the merger of Lloyds with HBOS. I opposed both the RBS-ABN AMRO merger and the Lloyds-HBOS merger at the time, and thought both warranted a competition investigation.

Today the government is advancing plans to encourage more banking competition and to split up RBS. RBS has already shed its insurance activities, and is planning to sell its US bank. The Investment bank has been slimmed substantially. The new corporate plan is to slim the bank further by disposals and concentrate it on improving and developing a good UK High Street clearing bank business capable of servicing UK individuals and businesses as they need. TSB has been established as an independent bank again to offer more competition to the Big 4, with sales of branches and business by Lloyds. The government assisted the Co-op which also wanted to become a challenger bank, but that miscarried. Perhaps Labour could tell us a bit more about why that bank went wrong and what they have learned from their close association with challenger banking.

I welcome any workable plans to inject more competition more quickly into banking markets. However, I cannot see how a government can insist on divestment by Lloyds when it does not own it. It looks like a lop sided attack on that bank where the majority shareholders may have strong views and legal challenges against any such policy. Nor can a policy which limits a bank’s market share work well. It means that as a large bank approaches the ceiling it has no further wish to compete for custom.

The right way to limit market share is to block all takeovers of more capacity by banks that already have a large market share. This is  something I assume is now policy but was not policy in the previous decade. Stopping banks winning more market share by being cheaper or offering a better service is the opposite of what we need.

I was pleased to hear Mr Balls on Radio 4 yesterday say there was ” a massive regulatory failure in the UK” before and during the crisis. I remember arguing that at the time, when we were told it was simply a case of bad banks.  It was not just bad  banking policy and behaviour at RBS and a few others but a big failure of the more complex rules and laws under Labour  to stop a crisis. More banks and more competition will help. That is exactly what is now happening, with the emergence of several new challenger banks and the sale of assets and businesses from conglomerate banks under orders of the Competition authorities and as a result of a change of corporate policy.



  1. zorro
    January 18, 2014

    Yes John, I mentioned a couple of months ago about Metro who are experiencing some good growth with no nonsense easy access banking facilities including seven day extended hours opening. This competition is good as banks have needed to be shaken up for a good while to respond better to customer needs and requirements.


  2. Gary
    January 18, 2014

    More competition won’t help. The banks are the biggest welfare scroungers in the world. They have had their risk transferred to the taxpayers. They have no incentive to reform. Banks live under govt and central bank guarantee, they are protected from the free market.

    Banks are a cartel operating under legal tender laws given the exclusive monopoly to print unsound money. When banks screw up they don’t go out of business they get bailed out.

    The banks are more than likely still insolvent zombies on life support. More of the same will achieve nothing. Adding more members to a cartel and calling that “competition” is cynical.

    Withdraw the banks’ welfare handouts and let’s see them sink or swim in a proper free market. That is the solution.

    1. zorro
      January 18, 2014

      That hopefully be implicit in a model offering greater competition. Ver few on this site agreed with how Prudence Brown bailed out the banks in 2007/8. A lot of us would have preferred a controlled administration/rationalisation with the BoE guaranteeing liquidity as required.


    2. Denis Cooper
      January 18, 2014

      “When banks screw up they don’t go out of business they get bailed out.”

      Not as a universal rule, usually only if their collapse would threaten to bring down the whole financial system, that is if they are “too big to fail”.

      The obvious alternative answers being that either they should never be allowed to become “too big to fail” in the first place, or if any bank is allowed to achieve that status then it should become subject to more rigorous regulation so that it won’t fail.

    3. Leslie Singleton
      January 18, 2014

      Gary–If it were your bank that sank and your deposits with it perhaps you wouldn’t be so sure

      1. Gary
        January 18, 2014

        I certainly would not like to lose my money in a failed bank. I would however have to suck it up and ultimately blame myself for making a poor choice. The free market is a harsh adjudicator. Caveat Emptor.

        1. Denis Cooper
          January 19, 2014

          It’s unrealistic to apply caveat emptor to a situation where millions of ordinary people, most of whom are leading very busy lives, are looking for somewhere to put their savings but almost all of them are unable to make any rational assessment of the reliability of a bank or building society and so make an informed decision on whether to entrust it with their money. Nor are they helped with this by the mass media; newspapers regularly publish tables of best savings interest rates without any regard at all to the soundness of the institutions which they are effectively recommending to their readers; then suddenly it’s in the news that Northern Rock, one of the banks which often appeared in those tables, may go bust within days, and that’s the first that almost all of its retail customers have ever heard about potential problems.

          1. Gary
            January 19, 2014

            You have just described the precepts of the Nanny State. Where people are just too dumb and helpless to look after themselves, so Big Govt must care for them. After all, Big Govt knows best, even though it did not have a clue about the approaching 2008 crash, and has no clue about the next approaching crash.

            If that is the case then let’s abandon pretenses and just move to full Nanny Control and declare a collective.

          2. Denis Cooper
            January 20, 2014

            You can call it a “Nanny State” if you are determined to take that extreme anarchistic view.

            I prefer to think of it as just an advanced society where there is division of labour and so one person has specialised skills which are made available for the benefit of others who do not have those same skills.

            You believe that everyone can and should be his own financial expert, not only scrutinising the retrospective information in a bank’s annual accounts but also with access to more current information and able to come to correct conclusions about the stability of that bank compared to others.

            I think that is totally unrealistic, especially if you want those people to also have the time and energy to do anything else which may be of use to you because you lack the skills to do it yourself.

            As far as I am concerned the protection of savers’ deposits should not be treated primarily as a matter of economics or high finance but as a consumer protection issue, no different in principle from the protection of consumers against the sale of adulterated or poisonous food.

            But I guess you would think that not only should everyone be his own financial expert, he should also be his own expert food analyst and the “Nanny State” should get out of the way on that as well.

    4. Mark B
      January 18, 2014

      I agree. We should have done what Iceland did. Just compare them to Greece.

      1. uanime5
        January 19, 2014

        I agree. We should have done what Iceland did. Just compare them to Greece.

        So you’re saying the UK should have refused to guarantee any bank accounts owned by people outside of the UK, borrowed huge amounts of money, and massively devalued the pound?

  3. lifelogic
    January 18, 2014

    I too was opposed both the RBS-ABN AMRO merger and the Lloyds-HBOS merger and thought both warranted stopping (or at the very least a competition investigation). This should have been clear to any sensible informed observer. So why did we have (some ed) incompetent (people ed) in charge of government, RBS and Lloyds, or advising on these matters at the time? RBS, post the government rescue, has been hugely damaging to the UK economy (and even to my businesses), sucking back perfectly good loans or upping margins hugely for no good reasons. Destroying vast numbers of jobs and investment and reducing tax take in the process. The government shooting itself in the foot as usual. It bailed out the banks then left (or even instructed) them to damage or even destroy many of the perfectly sound companies they had earlier lent to.

    It always seems to me that, in politics, the more often you are proven right the less chance you have of being placed in any position of power or listened too – also the converse.

    Talking of the government shooting itself in the foot, we now have this half witted Socialist coalition wanting to bring in a £7 per hour minimum wage. More job destruction on a huge scale. Lets all lift ourselves off the ground by just pulling on our shoe laces.

    Meanwhile in the USA energy can be 1/3 of the UK (green religion) cost and the minimum wage is more like £5 or non at all in many cases. How will we compete with the US let alone China at £7 per hour. Plus Employers NI on top too and daft employment laws and risks too.

    The policy will not even buy votes (with others money), the Tories will surely still be a very poor third in May 14. People want selective immigration to benefit the UK, free trade, less government/parasitic activity and to get out of the EU. It is as simple as that. Yet Cameron is still determined to treat his supporters with complete contempt by his actions and to go down taking the ship with him in the Major style. Has he learnt nothing from the disaster that was John Major?

    1. lifelogic
      January 18, 2014

      Dimbleby (on any questions) last night seemed childishly obsessed that Nigel Fararge had admitted that selective immigration would make us poorer. In fact good selective immigration would clearly make us better off than the current EU wide open gate to anyone (regardless of skills and numbers dependents) policy.

      Fararge, given a leading question, merely indicated that money was not the only thing that mattered. In the immigration case we can have our cake and eat it, or rather we could if we had any sensible government.

      1. Hope
        January 18, 2014

        Reported today a Somalian grandmother aged 68 years is allowed to stay with her daughter, single mother with three children, who lives on benefits. It was ruled that she would not cost the country any extra money and could stay? So how will she receive medical care and other public services? Will there not be any additional cost for keeping her? The immigration door is wide open, what did the government say about only having the brightest and those willing to work blah, blah blah. I am sick to he back teeth of paying for this and our elderly citizens die from the cold, only under Cameron.

    2. bigneil
      January 18, 2014

      “It always seems to me that, in politics, the more often you are proven right the less chance you have of being placed in any position of power or listened too – also the converse. ”

      not just politics -at my ex-workplace – after 40 years of being there -I was still in the same job -everyone above me had started after me – I saw (people with various listed bad traits ed) all get on ” the ladder” – Why was I never promoted? -I put it down to rampant (favouritism ed) -(followed by criticisms of management style etc ed)
      and to those who think I must be thick/useless to have never been promoted – I have roughly the same IQ as carol vorderman -and with one idea had saved the company well over half a million pounds – -this was admitted openly by the company. – other ideas had also been used.

    3. Mark B
      January 18, 2014

      lifelogic said;

      “Has he learnt nothing from the disaster that was John Major?”

      No ! That’s because he has that very man advising him. Which, I think, tells you more than you would really want to know.

      Its the definition of stupid !

      1. Hope
        January 18, 2014

        In 1992 Major got elected on the back of Thatcher. By 1997 4 million supporters left the Tory party, one of the main reasons was the Maastricht treaty and Major giving away our sovereignty and independence to the EU. 13 years in the wilderness and one would have thought Cameron might have learnt what went wrong with the party- after all he was around as an adviser. Not Thatcher, sleazy Major government was the problem. Now look at the company Cameron keeps, the Tory party will never recover after the next election.

    4. uanime5
      January 19, 2014

      Talking of the government shooting itself in the foot, we now have this half witted Socialist coalition wanting to bring in a £7 per hour minimum wage. More job destruction on a huge scale.

      Well you can’t reduce welfare spending (such as tax credits) unless people earn more money.

      Meanwhile in the USA energy can be 1/3 of the UK (green religion) cost and the minimum wage is more like £5 or non at all in many cases.

      Interestingly the states with higher levels of minimum wage have the higher level of growth. So it seems a higher minimum wage is good for the economy.

      How will we compete with the US let alone China at £7 per hour. Plus Employers NI on top too and daft employment laws and risks too.

      The same way Germany and most of Western Europe competes.

      1. Bob
        January 19, 2014

        If the government want to set the minimum wage, it should be at one and the same level as the personal tax free threshold.

        Nobody should pay tax on earnings below the minimum wage level.

  4. Mike Stallard
    January 18, 2014

    Who is the government made up of? Representatives of ordinary people. Where it is excellent is in bringing a little common sense into the proceedings. But in no way are MPs qualified bankers. That is why government ought to get right out of banking as soon as possible and leave it to the market. The London Banks provide the money which pays for our Welfare State. Mess that up, and we are in real problems.
    Nationalising anything, as you have often said, is disastrous. And yet the general tone of the discussion seems to assume that the government are the right people to handle the banks.

    It was appalling government inspired regulation, (bossy, interfering and ultimately missing the crash entirely) that entirely missed the 2008 crisis. Allow me to remind you, too, that the government cannot even balance the books any more. What is it? £1.4 trillion now?
    I notice that the EU is fascinated by banking. I wonder how much they are interfering. They cannot handle their own books either.

  5. Arschloch
    January 18, 2014

    John sorry but you have not mentioned improving their ethics and seeing any miscreants sent off for some serious jail time. One of them said it had cleaned itself up after having received billions from the state that otherwise could have been spent on useful things like the army,the police, schools etc. They even brought out a “customer charter” however since then they have been in trouble with the regulator over identity theft insurance, rate swops, PPI, LIBOR etc What is the point of having more banks if they continue to treat anybody who does business with them so unethically?

    1. Denis Cooper
      January 18, 2014

      Some serious jail time would certainly be the right thing in some of the worst cases, but the responsible authorities don’t seem particularly keen on that idea and have liked to claim that the present criminal law is inadequate and needs strengthening, so their hands are tied until then …

      Well, statute law may be inadequate, but there is the common law offence of conspiracy to defraud which could apply in many instances and which is in fact now being invoked in a few.

      Maximum sentence 10 years:

  6. Cheshire Girl
    January 18, 2014

    It’s just another vote catcher from Milliband! After all who doesn’t want to ‘bash the bankers’. ! He talks about forcing banks to sell branches, throwing thousands of people out of jobs and denying some areas of their local bank, forcing people to travel miles to another branch. He jumps on every bandwagon there is! It’s all about getting him in power . I distrust him absolutely!

    1. peter davies
      January 19, 2014

      I just hope when it comes to it that people are sensible enough to see through these soundbites

  7. Ralph Musgrave
    January 18, 2014

    More competition is near irrelevant in the total scheme of things. Of far more importance is the fact that bankers have run rings round politicians and regulators, and succeeded in watering down proposed regulatory reforms to near nothing. So: roll on the next credit crunch, followed by years of excess unemployment.

    For verification of the above point, see this recent Financial Times article (reproduced on a Spanish site):

    Plus see this recent article by Robert Schiller (recent economics Nobel laureate):–shiller-asks-why-innovative-ideas-to-prevent-another-financial-crisis-have-gained-no-political-or-media-traction#S7ifkG8twt5JidLQ.99

  8. Richard1
    January 18, 2014

    The hypocrisy of Ed Miliband and the Labour party is beyond belief. The banking crash was caused by the debt explosion and inept regulation which happened under Labour. Labour then compounded the error by promoting foolish consolidation by Lloyd’s and by pumping in over £70bn of taxpayers’ money, an unnecessary and wrong headed step. The banks could and should have been restructured at the expense of their shareholders and creditors, with liquidity provided by the BoE. Labour are now complaining about the market shares which they brought about and the fact that a state owned company is attempting to pay its employees market rates, when they were the ones who in ignorance and folly, made it a state owned company in the first place! Surely people can see through this hypocrisy – we really don’t want Labour back to make another train wreck of the economy.

  9. The PrangWizard
    January 18, 2014

    I thought today we may have something from you on the Minimum Wage since Mr Osborne has decided it can and should go up to £7.00 per hour. Not much point in having a Low Pay Commission; maybe that should now be scrapped, which would of course be a good thing.

    Do you agree with Mr Osborne on State control of wages? Are you still a supporter of his and your Party’s socialist thinking on this issue? After the MW is not exactly a feature of free enterprise – it seems to be becoming a part of the Welfare State, with private employers picking up more and more of the costs. And I’m sure you remember very well strikes over differentials.?

    Do you think he may have started a ‘bidding war’ between the three main political parties on this issue? Just how far to the Left are the Tories going to go, chasing Labour policies (again)? Are your leaders stretching your loyalty just a bit too far?

    Reply The Low Pay Commission have to decide, with Mr Osborne saying he wants a higher rate which does not cost any jobs. He has left to them the timing and size of the increase.

  10. Leslie Singleton
    January 18, 2014

    Excellent article–The Labour Party are going slightly crazy in their desire to show they have policies and that they would “do something”. All dead easy according to them. Energy too expensive? No problem, freeze prices. Not enough banks? No problem, create some more. Just like that.

    One simple point missing from your article is that as banks reach their cap they will not just stop trying for new business but, like night follows day, they will get rid of unprofitable business, and of course running (minimal balance) current accounts for people who use banks for nothing else is hugely unprofitable.

    And as you say it was the Labour Party that encouraged and allowed the diminution in competition in banking in the first place, just as it did with Energy companies (reduced in number from 17 to 6 or somesuch while Labour were in power).

    Of course it has in general been hard to perceive much that makes sense from the Monopolies and Merger people. Anyone ever glean why Little Chef was allowed to buy then close Happy Eater for instance? Now we have no Happy Eaters and (some? ed) Little Chefs have closed.

    Back to banks, many people are going to think that surely the problem is that banks are only too willing to close branches, not the other way round. More traffic on the roads and pressure on parking space with people (like me) forced to drive to the next town.

    1. Leslie Singleton
      January 18, 2014

      John–I suspect that one of my fellow commenters can provide a link showing number of Little Chefs that have closed but trust me it is quite a few. One used to be able on a long car journey to be sure that one would come along soon enough but very much not any more.

  11. oldtimer
    January 18, 2014

    The Labour party and past Labour governments have displayed a touching, but misguided, faith in the nostrum that big is better. The banking debacle was but the latest example. An earlier, disastrous policy was to actively promote, if not bully into place, the merger of the Leyland Group with BLMC in the late 1960s; and then to reinforce that mistake with the ill-fated Ryder report.

    The latest change of tack by Mr Miliband would be more convincing, as you say, if competition was allowed to sort out the winners and losers. Real competition does not and will not rest on what Mr Miliband may legislate or regulate but on the judgments and actions of the players themselves.

    It is significant that the most vibrant and fastest growing markets are those that that suffer the least regulation – the internet in all its ramifications (hardware, software, social media) is the prime example.

    PS Is the word “challenger” set to become a euphemism for that dirty word “competition” in the political vocabulary? If so it is time to think up a euphenism for that even dirtier word “profit”.

    1. bigneil
      January 18, 2014

      “PS Is the word “challenger” set to become a euphemism for that dirty word “competition” in the political vocabulary”

      does this make UKIP a “challenger” political party ? – if so it appears to be having quite an effect.

      1. Denis Cooper
        January 18, 2014

        Hold on, old chap.

        Yes, the Tories fervently believe in competition in many arenas – it’s the panacea for poor postal services and health services and so on – but not as it might work against their own party in the political arena.

    2. Mark B
      January 18, 2014

      Well, they already call, “Government Spending”, “Government Investment.” As if they are going to get a return.

      It is neither, Government or, Investment. It is taxpayers monies used for spending by Government, on things to do with the running of Government and, the defence and maintenance of Her majesties Realm.

  12. alan jutson
    January 18, 2014

    The most people most of the time probably only want very simple Banks for day -day Banking.

    Remember the Mutual Building Society or Credit Union type establishments.

    These organisations worked well for decades, until people and they themselves came under the trance of the green eyed monster of greed of forever wanting more customers , more money, more market share.

    They saw so called “Proper Banks” making millions by clever legal manipulation, and they wanted some of the action.
    The days of careful and limited lending ended in the rush for customers and money.

    Investments became more complex, so complex indeed that few understood them, a whole variety of lending plans and schemes were launched, and again many were so complex that few understood them.

    The one common theme in all of this was the Banks always won.

    You only have to look at a couple of lines written as part of the terms and conditions on the usual overdraft facility,

    “This loan is payable on demand”

    Those words say it all, no matter what the agreement, that facility can be called in at any time, and in the last few years many people and businesses have found this out to their cost.

    Thus we have today the huge range of offerings which are far from transparent, often show a reasonable headline rate for a year, but which offer poor value if unpicked .

    Yes we certainly do need more Banks, but what we want at the same time are good Banks, simple Banks.
    Indeed we probably need to re-invent the mutual Bank again.

    If that is to be the case, then surely these more simple Banks only need simple but effective regulation.

    Surely a simple Bank does not need the complete range of highly complex regulations (which have failed in the past) that a the larger and more complex international operation requires, which would discourage a simple Banking operation from setting up due to both cost and compliance..

  13. Alan Wheatley
    January 18, 2014

    My understanding of what Mr. Balls said is that he is in favour of reducing the size of banks by reducing the number of branches they operate. Such policy would reduce competition in some locations as banks focus on bigger branches in more populous areas.

    In the small town where I live, in the last couple of years we have lost HSBC altogether and Nat West is only open on very restricted hours, leaving just Lloyds.

    Perhaps the best prospect for improved competition will be further growth of internet banking. The technology already exists to provide person-to-person contact with your internet bank, but the implementation needs fibre connections and some imaginative thinking (Skype won’t do).

  14. Brian Tomkinson
    January 18, 2014

    JR: “I am glad the idea of more banking competition is now popular with Labour”
    You need to be careful what you wish for – “A billion pounds was wiped off the value of taxpayer-owned banks on Friday after Ed Miliband promised to bring “reckoning” upon the industry. ” – Daily Telegraph, 17 Jan 2014.

  15. JoeSoap
    January 18, 2014

    Your version, too, is a little lop-sided.
    Both Labour and Conservative-led coalition parties in government have wanted and want strong banks. In Labour’s case this was as a ready source of tax revenue and in the coalition’s case it is to build them up again without too much government assistance. The problem is that this strength in both cases comes from the banks being able to rip-off the consumer, via high interest rate differentials, mis-selling (words left out ed), and manipulating key indicators, (words left out ed) and who knows what else.
    Labour has rightly spotted (far too late) that this “strength” of the banks through dodgy dealing comes at a cost.
    First to Joe Public, who ends up paying out 4% for a mortgage on property with a government-backed collateral, but getting nothing on his current account, paying for insurance policies which are unnecessary.
    Second to small businesses which, when they qualify for a loan, pay an even higher rate of interest on loans than residential mortgages, and are sold dodgy interest rate derivative products on top. HMG is probably losing more corporation tax from small businesses which are being ripped than it is gaining from the banks right now. That is what has struck a chord and is behind Chucka Ummuna’s explanation yesterday. Perhaps Labour haven’t quite got this right yet, but they are generally heading in the right direction on this one.

    This can of worms is still there, doing the damage, despite HMG owning most of RBS and part of Lloyds. That is the appalling thing. That is why this has to be tackled with more determination and urgency than has been shown these part 5 (five) years, and is one reason to vote UKIP, get (for a short while) Miliband.

    Reply There are honest banks and bankers as well. Those people and institutions that have been guilty of mis-selling or manipulation will be disciplined or prosecuted and their banks fined.

  16. Kenneth
    January 18, 2014

    Risk mitigation is a paradox .Try out this analogy:

    The government forces all roads vehicles to drive at no more than 10mph.

    As a result we become complacent and cross the road without looking. Effectively the government has taken more responsibility and we have taken less responsibility for ourselves. Great costs have been incurred yet the risk is still there.

    The more the state does to mitigate risk, the more risky we behave: the more complacent we become.

    Not only that, but imposing more and more regulation adds tremendous costs. In my view the lack of competition in banking is due to the excessive regulations and barriers to entry (e.g. very high capital requirement).

    This is quite a cosy set up. Just as the government prices people out of work by raising the minimum wage, it prices out new competitors to banking through heavy regulation. The cartel is the winner. The rest of us are losers.

    In my view we have a choice:

    1. Risk-free bank: i.e. a nationalised bank

    2. Free market: in which case we must accept occasional bank failures including losses for savers

    Of course a nationalised bank is not risk-free under our current employment laws since union action could paralyse the nation’s finances if there were a national bank strike.

    The current situation is the worst of all with a virtual cartel. The current measures are just tinkering in my view and do not get to the heart of the problem, which is excessive government meddling.

    1. Denis Cooper
      January 18, 2014

      “Of course a nationalised bank is not risk-free under our current employment laws since union action could paralyse the nation’s finances if there were a national bank strike.”

      I think that would quickly become an “emergency” within the terms of the Civil Contingencies Act 2004 and the government would assume emergency powers, including the power to order strikers back to work on pain of criminal sanctions.

      “(2) In particular, emergency regulations may make any provision which the person making the regulations is satisfied is appropriate for the purpose of – …

      … (d) protecting or restoring a supply of money, food, water, energy or fuel …

      … (h) protecting or restoring the activities of banks or other financial institutions …”

    2. uanime5
      January 19, 2014

      The more the state does to mitigate risk, the more risky we behave: the more complacent we become.

      Care to explain why fewer people are dying or being maimed in industrial accidents despite an increasing number of to all the safety measures introduced by the government? Could it be because people don’t take unnecessary risks simply because something is safer.

      In my view the lack of competition in banking is due to the excessive regulations and barriers to entry (e.g. very high capital requirement).

      How exactly are you going to set up a bank unless you have a large amount of capital?

      2. Free market: in which case we must accept occasional bank failures including losses for savers

      Given how much people protested about the banks in Cyprus taking part of their customer’s saving it’s clear that losses for savers isn’t viable.

  17. Richard
    January 18, 2014

    I think of more importance initially is the stability of banks.

    This requires the separation of retail and investment (betting/casino ?) banking, with the investment banks owned by shareholders with unlimited liability as exists for the Lloyds Insurance Market.

    1. Bert Young
      January 18, 2014

      Entirely agree that Investment and Retail banking should be separated . The two skills are completely different and depend on the background and training of staff . Retail banking is related to the very strong link and understanding of the community where it exists ; Investment banking is based on much wider risk assessment and the understanding of market competition . Mixing the two together created too many complications for the Board Room . Mr. Carney is right to observe that splitting and creating banks will not improve efficiency and performance ; improving a bank’s specialisation is what matters .

    2. Leslie Singleton
      January 18, 2014

      Richard–So-called “investment” so-called “banks” should not be allowed to call themselves banks in the first place. Having been taken over by one, I can assure anyone interested that they bear not the slightest relation to anything resembling a real bank.

  18. Denis Cooper
    January 18, 2014

    Of course that “massive regulatory failure in the UK” had nothing whatsoever to do with Brown following the EU model by taking the prudential supervision of commercial banks away from the national central bank, the Bank of England, and instead giving it to a bunch of (people who did not do it well ed) at a new independent regulator, the Financial Services Authority, under the leadership of Sir Callum McCarthy, who was later allowed to quietly slip off the stage leaving behind a scene of total devastation for which the Governor of the Bank of England, Sir Mervyn King, could then be unjustly blamed by journalists in the mass media who should have known better.

    1. Leslie Singleton
      January 18, 2014

      Denis–The Bank of England in its pre-Brown role of regulator had earned massive respect and I remember personally quaking at being invited literally to a cup of tea there to discuss a certain approach we had (correct as it happened) to exchange positions. The FSA on the other hand with its alphabet soup name and multiple choice exam questions was held in something close to derision and it doesn’t surprise me at all that it failed utterly. In years gone by Brown would have been attainted. I suspect he thought that the Old Lady was too elitist.

      1. Leslie Singleton
        January 18, 2014

        Postscript–I meant to say name and qualifications–I think I became “SFA”, which I didn’t dream of adding after my name

      2. Denis Cooper
        January 18, 2014

        It’s the EU model – independent central bank, and a separate independent financial regulator. The Irish did the same thing, and having discovered the hard way that it doesn’t work they’ve reversed it. I’ve found in the past that if you want to check whether there is EU involvement in something that is happening in this country the quickest way may be to check what the Irish newspapers say, as they tend to be more frank about it.

  19. Bob
    January 18, 2014

    Gordon Brown and his little helpers, Balls and Miliband were quite happy to sit back and take the money when the banks were declaring multi billion pound profits, and they never questioned where all the money was coming from. Of course, as it turned out the profits never really existed, it was make-believe money and Labour had to raid the Treasury to fill the enormous black hole that was remained after the bankers lived high on the hog with generous expense accounts and helped themselves to huge salaries, bonuses and pensions pots on the strength of the bogus “profits”, leaving us with a huge debt which will be handed to our children and grandchildren to repay.

    After ruining our economy, presiding over a string of financial disasters and a debt fueled housing boom triggered by Brown’s pension fund raids forcing people to look at alternatives to the stock market to secure their retirement, it should be beholden on the Brown boys to keep their collective gobs shut on this subject.

    The Labour Party itself is (financially stretched ed) but (was helped by ed) Labour’s buddy, The Reverend Flowers’ (at ed) the Coop Bank .

    Furthermore, after three and a half years of the coalition government I have seen nothing that would convince me that they have the necessary competence to deal with Brown’s legacy. Mr Osborn’s “Help to Buy” scheme being a case in point.

    We desperately need new political leadership, a plain speaking leadership who would not be afraid to ruffle a few feathers. We need retail banks and building societies on the high street and the merchant banking should be confined to the City sharks who can take care of themselves without recourse to tacit guarantees and/or bailouts from the general public.

  20. acorn
    January 18, 2014

    “Challenger” trains, now “challenger” banks.

    Anway, there are about 150 UK incorporated, deposit taking banks, and about the same number EEA and non-EEA incorporated banks, licenced for deposits by the PRA (BoE). How many more do you want? However, they don’t all have “Clearing and Settlement” capabilities and reserve / securities accounts at the Central Bank. So I am not sure which type of bank, the supply of, needs “challenging”. Please advise.

    A much better idea would be actually separating the Payment, Settlement and Clearing system from the Casino Banks. Systemically Important Payment Systems (SIPS), needs to be separated and directly supervised by the currency relevant Central Bank. As a Central Banks is immune from any liquidity problem in its own currency, it is the lender of last resort that keeps the system moving at the speed of light. (Just like the US FED does as a SIPS). The Casino banks could then be regulated like any other Las Vagas type casino, or a UK Bookmaker, or a Bingo Hall.

    For those who haven’t got a clue about Clearing, have a read of the BoE .

    1. waramess
      January 18, 2014

      Very smart idea Acorn and at the same time relax the issuance of banking licences and remove government guarantees of all sorts.

      The insurance industry are more than capable of offering depositors protection and any increase in cost of banks attracting deposits will be reflected in the increased strength of the UK insurance industry

      1. Denis Cooper
        January 18, 2014

        It would be far better if retail banks and building societies were required to offer customers savings accounts where all their deposits would be automatically insured with insurance companies in the normal kind of way that things are insured, as obviously the insurance companies would have an interest in assessing the strength of the depositor taker when setting the premiums whereas the state backed FSCS scheme does not vary its levy according to the riskiness of the depositor taker. However as we have seen insurance companies can also go bust, and even if it was required that retail deposits should be insured with two or more companies to provide some redundancy I doubt that the state could be completely removed from the picture.

      2. alan jutson
        January 18, 2014


        Do you really think Insurance Companies would come to your rescue !!!!.

        Holiday Insurance claims, so many ways out, proven not to pay
        Health policy Claims, so many ways out, proven not to pay
        Equitable life Pensions debacle, proven not to pay.
        FSA regulator a waste of time..

        Sorry, I do not have your faith in that industry.

        1. Denis Cooper
          January 18, 2014

          It wouldn’t be you, the retail depositor, who had to deal with the insurance companies, it would the bank or building society which had accepted your deposit. I can see that a large organisation could arrange its own insurance but it would make no sense for every retail depositor to do that, just as it would make no sense for them to individually sign up to the present FSCS scheme.

      3. Richard
        January 19, 2014

        It is not insurance that is required but unlimited liability shareholders such as exists at Lloyds Insurance Market.

    1. Lifelogic
      January 18, 2014

      Of course we are better off out as a Greater Switzerland with sea ports and huge shale gas reserves. We do not even need to default on our huge debt like Iceland.

      Alas we have Cameron no a Hannan as leader and soon worse (but not much) Miliband.

      1. Leslie Singleton
        January 18, 2014

        Life or lifelogic–I assume you have read Hannan today or perhaps yesterday (on the non superiority of blocs). How do the EUcrats live with themselves when they read what one of their number has written?

  21. John Wrake
    January 18, 2014

    Mr. Redwood,

    In the light of the failures of those banks which were deemed ‘too big to fail’ and were bailed out, why do you not mention the benefits of splitting the High Street arm from the investment arm of a bank, thus protecting small customers from the excesses of bad investments, which could then properly fall on the shareholders.

    This was achieved in the U.S. by the Glass Stiegal Act, repealed before the banking crisis, which some think contributed to the problem, but once again under discussion there.

    Is the answer to individuals’ and small businesses’ problems not lack of competition by banks, but the failure of the banks to operate in the former’s real interest.

    Competition is alive and well, judging by the money being spent by existing banks on massive TV advertising and a wide variety of sweeteners.

    Reply Because it was not the Investment banks that took down the conglomerate banks. Northern Rock went down first with no Investment banking arm.

    1. acorn
      January 18, 2014

      The whole of Northern Rock was an Investment bank! As Iain Dey
      (Telegraph) said back in 2007; I paraphrase. In the late 1990s it became the first UK lender to fully embrace mortgage securitisations – the process where pools of mortgages are packaged up as bonds (RMBS), and sold to investors in the wholesale market. It became dependant on short term credit that was getting more expensive day by day; to fund 30 year mortgages, crazy.

      This was a great wheeze that allowed the bank to grow its lending book without having to attract savers’ deposits. American banks had been doing it for years. Northern Rock would write the mortgage, then sell most of the risk off its balance sheet within a few weeks. By early 2007, roughly 50 per cent of the outstanding mortgages in the UK had been sold off in securitisation vehicles which proceeded to implode.

      Reply It was not an Investment bank. Selling off completed mortgages to others through securitisation was the only sensible bit – that cut their risk and gave them more balance sheet capacity. it was their reliance on wholesale funds for conventional lending that started the collapse, and then the depositors who brought it down.

      1. Denis Cooper
        January 18, 2014

        Actually I’m not in favour of that “Selling off completed mortgages to others through securitisation” and I don’t think it is sensible. I would prefer to take out a mortgage with somebody and expect that it will stay with them, not end up in the hands of somebody else somewhere else in the world. And wasn’t the casual trading of those packages without proper inspection of their contents one cause of the crisis, because you could sell on a sub-prime mortgage which you should never have given out in the first place and take your profit, and let somebody else take the hit later?

        Reply Selling on the mortgages made N o9rthern Rock itself more stable, not less stable. The people who bought the mortgages tended to have the money to be able to afford losses on them, so it added overall to the stability of the system. It was financing things from wholesale lending and deposits that was unstable, an instability added to by the wrong decisions of the Bank of England.

        1. Denis Cooper
          January 19, 2014

          Well, you haven’t replied to my main point that the casual trading of packages of mortgages around the world without inspection of their contents was one cause of the crisis.

          I recall somebody saying that he had been involved in that and it was a matter of buying and selling over the phone and taking it all on trust, and as I recall there were many packages which were given the highest credit rating but later turned to include a fair proportion of dross introduced right at the start when shady characters in the US got their commissions for arranging mortgage loans for people who were plainly very unlikely to be able to repay them, but that was OK because the mortgage was quickly sold on and off their hands.

          I see that the law is now beginning to catch up with some of those responsible:
          but that doesn’t undo the damage they caused.

          Reply That is a different point. The fact remains that a Bank like Northern Rock reduced its risk and improved its balance sheet by selling the mortgages on. If subsequently people valued them wrongly or paid too much for them they could get into financial trouble. If they did so in an in vestment fund that did not damage the banking or financial system it just meant some investors lost some money.

    2. formula57
      January 18, 2014

      The notion of splitting the high street and investment banks (in some repeat of the US Glass Steagall) likely would be ineffective today as the latter banks are customers of the former and so failure and panic in investment banks would cause them to withdraw funds from high street banks with consequent spread of failure.

  22. stred
    January 18, 2014

    The impression given by the various people who have tried to start or grow small banks is that regulation makes it too difficult and expensive. Mr Milliband seems not to understand that, as with energy prices, it is actions taken by the previous Labour government and continued by the Coalition that is causing the problem.

  23. John Swannick
    January 18, 2014

    If only five banks is a problem, presumably the cap on market share is going to be less than 20%. As at least one of the banks already exceeds this threshold, presumably Labour’s plans include break-ups as well as limits on growth? Should those in favour of greater competition really be opposed to this? TSB was created through – dare I say it – European regulatory insistence although still part of the Lloyds Banking Group until it can find a buyer or float. Lloyds did not hive off just poor or low value customers – as far as I am aware – so that argument against a cap seems spurious. Of course, the big five have different market shares in different products so just looking at current accounts is rather simplistic. I have no confidence in the Competition Commission and their theoretical academic approach – not least this odd obssession with product bundling -which has spectacularly undermined the viability of some product markets, not least SME banking, which have historically been cross-subsidised by more profitable operations. Any new entrants – if such could ever gain a toe-hold (and some pretty high profile people have failed to get off launch pad in recent times) – would want to cherry pick the more profitable markets which, for example, would not include ‘free’ current account banking. So it seems to me that regulatory break-ups are the least worse option. Then, of course, there comes the issue of continued state protection of the industry which allowed these behemoths to develop inured to the contempt of their customers. Could lower market concentration and fewer ‘too big to fail’ banks allow a future government to peal back the regulatory cosh in return for acceptance (or re-emergence) of greater social obligations by the banks?

  24. margaret brandreth-j
    January 18, 2014

    Will slimming the banks make it more difficult for them to be financially powerful and be in positions to give loans etc. ?

  25. waramess
    January 18, 2014

    Interesting that the partisan tribal instincts come to the forefront when the opposition make sensible suggestions. Could it be that the fear of the forthcoming elections have anything to do with it.

    My views are probably to the right of the Conservative right however Milliband has made two very sensible statements: one on energy and the other on banking so, why not just embrace and refine it then you would have a certainty of carrying through reforms that are clearly necessary?

    Reply I do embrace banking competition, and so does the government. They have already set up challenger banks and are now breaking up parts of RBS as proposed. Mr Miliband’s further proposals have legal and commercial problems, and could reduce competition in some ways. I am not being tribal, but analytical.

  26. behindthefrogs
    January 18, 2014

    I fail to see how RBS selling its US bankcan have any effect on competition in the UK industry. As long as the US bank is profitable it will surely be returning profits to the UK, just the sort of activity we require in the current economic situation.

  27. Andyvan
    January 18, 2014

    Given that banking sector regulation has been a catastrophic failure in every way possible if the government actually wanted to create strong and vibrant banks the best thing it could do is repeal virtually every regulation pertaining to them and let a free market thin out the unfit and corrupt. New players would come into the market and cause a real shake up, forcing the old fossilized relics we now suffer from to change or die. It would work a million times better than the pathetic attempts by central planners.
    The only problem is that the government needs old style banks to prop up it’s own appallingly bad financial management. Without the revolving credit and money printing circus we have now Westminster would have to live within it’s means and that would not go down well with the army of public sector leeches. So instead we’ll have a smokescreen of impressive sounding but ultimately totally ineffective measures in order to keep the gravy train on the tracks.

    1. uanime5
      January 19, 2014

      Given that banking sector regulation has been a catastrophic failure in every way possible if the government actually wanted to create strong and vibrant banks the best thing it could do is repeal virtually every regulation pertaining to them and let a free market thin out the unfit and corrupt.

      Do you have any examples of this happening? Usually what happens when the regulations are removed is that the corrupt businesses form cartels and use their power to remove competitors.

      New players would come into the market and cause a real shake up, forcing the old fossilized relics we now suffer from to change or die.

      That assuming that these new players don’t all go bankrupt because there’s no longer any regulation to ensure that they’re financially sound.

      The only problem is that the government needs old style banks to prop up it’s own appallingly bad financial management.

      Why? The Bank of England can be used to print as much money as required so the government has no need for any other banks.

      1. Denis Cooper
        January 19, 2014

        “The Bank of England can be used to print as much money as required”

        I see that you’ve caught up with that wonderful idea now being promoted by those who seek to justify the habitual profligacy and irresponsibility of the Labour government and wouldn’t mind it being repeated.

  28. Antisthenes
    January 18, 2014

    Good intentions do not necessarily produce good outcomes as Labour demonstrates so often. As with freezing energy prices RedEd’s ideas on how to increase banking competition are totally divorced from reality. He believes that state intervention is the key to solving energy and banking problems and at the same time forgets that it was state intervention that mostly caused the problems in the first place. Every time he opens his mouth he causes consternation in the markets which tells us that those who actually understand these things have no confidence in him. This is the man who is very likely going to enter no 10 in 2015 and he will get there on the back of promises that will in the end do far more damage than good. If he does enter no 10 then he will be a prime minister that is going to be on a par with Gordon no boom and bust and I saved the world Brown, destroy the national economy and who he admires Hollande, lame duck socialist Obama and blame capitalist profiteering not socialist engineering for destroying my economy and high inflation Maduro.

  29. John B
    January 18, 2014

    Bank competition is severely limited because of onerous and expensive regulation which deters new market entrants, and feather-beds incumbants.

    The solution to this problem is more regulation: billions wiped off value of banks as investment discouraged.

    I admire genius at work.

    Meanwhile: does anybody have the latest figures for how many drug barons, organised crime bosses have gone bankrupt and terror organisation have been put out of business ‘thanks’ to the anti-money laundering regulations and other restriction?

    Funny old World.

  30. lojolondon
    January 18, 2014

    John, Guido made a great point – Miliband is making a big deal out of wanting two new banks – but Gordon Brown mashed Lloyds and HBOS together, then Labour put a totally unqualified person with no banking training or experience and an abundance of personal issues in charge of the C-Op. Guess what, if Labour had interfered less then we would have had two more banks in the UK, it was them that did the damage as little as four years ago! How short is the Labour and BBBC / MSM memory?

  31. paul
    January 18, 2014

    hi print the £375 billion,just in case they go belly up

  32. John Wrake
    January 18, 2014

    Reply to Acorn at 1.40:
    I am intrigued by the last phrase you used in your reply: “and then the depositors who brought it down. ”

    Does this suggest that the banking crisis is really the fault of those who expect their money, properly deposited with a bank, to be available to them when they ask for it?

    That may be an economist’s view of morality, but it certainly isn’t mine. Was there no good reason for depositors to be concerned about the safety of their deposits? What had caused that concern?

    You seem to be suggesting that Northern Rock was the epitome of probity, doing everything that was sensible and right, until the mad depositors asked for their money!

    Do you also agree with the current fraud, called by the Chancellor and the Bank of England ‘Quantitative Easing’ or do you agree with the judge in a recent court case, who said that printing unsupported money was forgery deserving of prison, since it was an attack on the nation’s currency and the whole basis of the economy?

    John Wrake.

    Reply I was stating a fact. It was the wish of many depositors to take their money out that brought the bank down. That is how many banks crash. It may be rational for each depositor to demand their money back, but if too many do at the same time there is trouble. The Central Bank in that situation is meant to lend as lender of last resort so all depositors who want to leave can leave. Northern Rock’s business model relied on a lot of wholesale money, with the approval of the Regulator. The wholesale markets dried up. The Central Bank did not supply enough liquidity to replace the missing wholesale money. depositors then took fright and that brought the bank down. The Bank was not insolvent before the run.

  33. wodge
    January 18, 2014

    we used to have a perfectly nice bank,very user friendly,fully protected by the government.It was called Giro,and most of its business was done through the local post office network which meant,before the decimation of these excellent institutions,it was designed to encourage people ,whose banking needs were simple,to get used to banking(I had an account to keep my business expenses separate from salary).We could do with more banks using the facilities of these P .O’s,so as to improve accessability for many whose nwwds are basic

  34. Mark B
    January 18, 2014

    This is not a new story.

    But what does concern me though, is Local Councils setting up their own banks. I do not know much about banking law and regulation but, is the Coalition Government monitoring this. I think it should not be the business of Councils, just in case the business goes bust and rate payers are forced to cover the losses.

    If both National, and Local Government cannot manage banks and banking as shown above, then I do not believe they should be trying to regulate the system.

    What is needed is access to local markets and ‘sound’ and ‘effective’ regulation in order to ensure TRUST, which is at the heart of good Government, business and finance.

  35. margaret brandreth-j
    January 18, 2014

    Off topic . but relevant in a world of money. I have just listened to your speech at the Oxford Union on freedom. The roundabout traffic light scenario though does not apply to any one political persuasion, but rather to brass. When I was relatively well off with boats , ball gowns and the trappings of the old class system I didn’t think about freedom, but I was trapped in a box of the times cultural aspirations. What is different and significant now I live modestly is that one and one makes two because someone else says it and when I had more of the middle class paraphernalia one and one made two because I said so.

  36. uanime5
    January 19, 2014

    Our current problems in banking emerge of course from the previous Labour government which aided and abetted the reduction of competition on a large scale.

    Something the Conservatives didn’t object to.

    The government assisted the Co-op which also wanted to become a challenger bank, but that miscarried. Perhaps Labour could tell us a bit more about why that bank went wrong and what they have learned from their close association with challenger banking.

    Is this the same Co-op boss who hosted a reception at the Tory Party conference and whose bank Osborne said should be spared from EU rules designed to prevent banks collapsing?

    It was not just bad banking policy and behaviour at RBS and a few others but a big failure of the more complex rules and laws under Labour to stop a crisis.

    Given that the Conservatives were calling for regulations to be made even more lax so that the UK could become more like Ireland they’re not in any position to criticise Labour.

    In any case the number of banks could easily be increased by separating all retail banks from investments banks. That way people’s savings won’t be at risk if a casino bank runs out of other people’s money.

    1. Edward 2
      January 20, 2014

      The number of banks will not alter if they are split Uni.
      Its only an accounting split.
      No new extra banks would be created.

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