Price caps, benefit caps, immigration caps, bank caps. How about a ‘cap’ cap?
Joe Wright, 15 January 2014
According to the papers this morning, Ed Miliband is considering the idea of a cap on the size of banks, specifically their share of the current account market. The biggest four UK banks hold roughly 80% of all current accounts between them, essentially meaning they are too precious/dangerous to fail. Miliband, who has referred to the current make-up of the banking industry as “economically damaging and socially destructive”, is rumoured to favour a cap of 25% for any one bank; Lloyds Banking Group currently holds 30% of personal accounts.
In practical terms, it would mean forcing banks to sell more of their branches to competitor banks (smaller ones). This is something which is already in motion (see graph notes below), but not at the pace and scale that Labour would like. The government, meanwhile, hopes existing sell-offs will have reduced the all-important 80% share to between 65 and 75% in the past year alone.
Banking caps are not unprecedented. Something similar already exists in the US where there is a cap on inter-state acquisitions that would give a bank more than 10 per cent of the country’s total deposits. There is also a continued debate about a cap on a bank’s total assets (as a percentage of GDP).
The danger with this latest announcement, however, is that it indicates caps are fast-becoming the primary political currency. So far there has been Labour’s promised cap on energy prices, a cap on the overall cost of payday loans (adopted by the government), the government’s cap on benefit claims, a cap on the welfare budget, a promised cap on net migration of 100,000, a currently-debated cap (of sorts) on bankers’ bonuses. In the lead up to the next election it is likely there will be more. There have been calls for a cap on rent for tenants of private landlords, and speculation about a cap on house prices to name just two.
Their appeal is understandable: they’re politically punchy, easy to communicate to the electorate, and send a clear signal to market actors i.e. bankers, payday lenders, rogue landlords or ‘skivers’. The danger is that other more flexible solutions are side-lined because they are too complicated and difficult to promote; caps cannot always account for complexities and unpredictable consequences. A particularly pertinent case in point is Labour’s over-ridding of competition rules in 2008 to allow Lloyds to buy the failing HBOS bank, resulting in one of the market’s largest mergers.
Caps should be a policy of last resort. As has been long supported by Civitas ( and now Labour), the creation of regional banks is a far more pro-active policy which will change the sector far more positively than any cap. But I guess there isn’t much of a headline in that.
(Since August 2012, Lloyds TSB has divided into Lloyds Bank and TSB respectively. As a condition of receiving State Aid, RBS group was ‘required to divest 308 RBS branches in England and Wales and 6 NatWest branches in Scotland’. It is now creating a new bank called Williams & Glyn’s to sell off these branches.)