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Closed-Shop City Barring New Banks

Major retail banks exploit cosy relationship with FSA to keep out competition

Britain’s financial regulators have been co-opted into protecting major banks from competition, according to a new Civitas report. The result is that big banks can get away with reducing lending to businesses and offering poor service to customers, without the risk of losing accounts to competitors.

Street Cred, by Stephen L. Clarke, examines how financial regulations, introduced to protect consumers, have, ironically, been wielded to defend the market position of big commercial banks against new entrants. Clarke uses examples of successful local banks in parts of Europe to show how a rejuvenated local banking sector could more effectively serve British businesses and consumers.

Barriers to entry

The Financial Services Authority (FSA) was established with the noble intention of protecting consumers from sharp banking practices and to ensure the stability of the financial system. But Clarke shows how FSA regulations discriminate against new entrants. These penalising regulations mean that:

  • New banks may be forced to hold as much as five times more capital than existing banks when they start up. This adds to costs and prevents money being used for loans. (p. 50)
  • New banks often have to hold double the amount of liquidity or cash-on-demand, again making them less able to compete with incumbent firms. (p. 51)
  • New banks are effectively barred from directly using the payment systems that connect banks and must access the systems through large banks at a price they set. (p. 52)

Clarke explains:

It is… hard to imagine a more effective way of enshrining a monopoly than by allowing incumbent firms to set the price of market access for those wishing to challenge them. (p. 52)

Who you know, not what you know

The report also explains how a conservative culture within the FSA encourages regulators to favour the known over the innovative. For example, the FSA has shown a strong preference for banks that intend to develop a branch network, which freezes out providers who want to make greater use of Internet or telephone banking.

This bias works in favour of individuals with insider knowledge of existing banks, with the result that successful applicants tend to offer conservative, rather than truly competitive, business plans:

The FSA’s preference for familiarity also extends to the staff and the owners of banks. The FSA is significantly less likely to block or obstruct an application if it is submitted by an applicant it knows or if the new bank plans to employ senior executives that have extensive experience working in one of Britain’s large banks. (p. 48)

The result is a lack of variety in British banking. Commercial banks can rest too easily even as their business clients struggle to access capital.

Closed to business

Clarke outlines the results of this lack of competition for British businesses:

  • Business lending a low priority for major banks: between 2000 and 2010, Britain’s banks increased their lending to other financial firms by 177.8 per cent and increased their lending for property (commercial and residential) by 176.9 per cent. But lending to businesses grew by only 17.4 per cent. (p. 3) Lending to businesses only makes up three per cent of the balance sheets of Britain’s banks. (p. 6)
  • Business lending hit particularly hard during the financial crisis: between 2007 and 2010 Britain’s banks cut back on lending to businesses. As a result businesses are 20 per cent less likely, and fast growing businesses nearly 40 per cent less likely, to receive a loan.
  • Higher costs for businesses: the cost of taking out a loan has increased by 20 per cent. (p. 4)

The report notes that consumers are also badly served under the current regime. Britain’s large banks regularly rank near the bottom of customer satisfaction surveys. (p. 7)

The banks that like to say ‘ja’

Clarke reveals the stark contrast between Britain’s banks and local banks in Europe. Germany’s local banks, the Sparkassen, are the largest group of banks in Germany. They are more profitable than the German commercial banks and annually make nearly double the amount of loans to businesses. (p. 21)

  • Between 2006 and 2011 the Sparkassen increased lending to businesses by 17 per cent while Germany’s commercial banks cut lending by 10 per cent. (p. 26)

Similarly, Switzerland’s forward-looking Cantonal banks have more deposits and a greater share of the mortgage and domestic loan market than UBS and Credit Suisse, the major Swiss commercial banks. (p. 12)

  • The Cantonal banks increased lending by 15 per cent during the financial crisis while UBS and Credit Suisse cut lending by 39 per cent. (p. 17)

Government should kick-start competition

The report proposes some essential reforms that would help Britain increase diversity in the banking system. This would force commercial banks to become more competitive:

  • Remove regulations that obstruct the creation of new banks.
  • Create a new legal framework for local banks that gives them a mandate to serve their local communities much as the German Sparkassen and Swiss Cantonal Banks do.
  • Provide an initial fiscal stimulus to new local banks by taking bids from local authorities or local mayors, selecting applicants through a competitive tendering process. Clarke estimates that £100 million would be enough to establish four local banks.

Tony Greenham, head of Finance and Business at the New Economics Foundation, said of the report:

‘There is a growing realisation across the political spectrum that the UK’s banking system is top heavy and unbalanced towards very large universal global banks. We need to reinvigorate local banking. This important new report from Civitas shows that there is much we can learn from our international competitors.’

Clarke concludes:

…the Government needs to remove the barriers to entry that protect the current banking oligopoly and take steps that will allow local banks to challenge it. (p. 10)

For more information contact:

Stephen L. Clarke, Research Fellow, 07707 233188 and

Civitas 020 7799 6677

Notes for Editors

i. Stephen L. Clarke is a Research Fellow in economics and industrial policy at Civitas.

ii. Street Cred: Local Banks and Strong Local Economies (RRP: £5.00) is available from the Civitas shop and by calling 020 7799 6677.

iii. Civitas is an independent social policy think tank. It has no links to any political party and its research programme receives no state funding.


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