Bank Bashing Competition


Raaah, aren’t the bankers evil? Crashing the economy and all that. Then giving themselves massive bonuses. Pure evil. Something must be done. It is time for a reckoning. Hard to disagree and so a nice easy run for Ed Miliband in his recent speech. The weird thing is that the speech actually committed a Labour government to doing things which were already happening, doing things it didn’t have the power to do without primary legislation, and doing things which might lead to answers it didn’t like.

Setting up challenger banks? Sounds good. Although it is hard to see what this means if it doesn’t mean what Lloyds is already doing with TSB and RBS with Williams & Glyn. Particularly as the announcements had the unfortunate side-effect of wiping about a billion off the value of those banks in the space of a few minutes. Given that concentration of branch networks was part of the package to “save the banks” pushed through by the last government, including devising a new public interest category to enable Lloyds to acquire HBOS and the need to reverse this as soon as possible was noted by the current Chancellor in opposition as well as being a requirement of the European Commission in clearing the rescue packages, it is hardly a new and exciting policy.

The proposal to ask the Competition and Markets Authority (CMA) to report on how this should be done “on day one” of a new Labour government is something which Miliband can’t deliver on. While it will be possible for a Secretary of State to intervene in a market investigation to require the CMA to look at public interest considerations, it is not, under the present law establishing the CMA, possible for the Secretary of State to order a market investigation. So, the first step that would be needed would be for the CMA to have conducted a market study into relevant parts of the banking industry which concluded that there were adverse effects on competition (AEC) which required a more detailed market investigation.

The OFT (which is to be merged with the Competition Commission in April 2014 to form the CMA) is currently engaged in a market study into SME banking. This is part of a long ongoing process which started with the Competition Commission’s 2002 investigation, which itself was in the context of several bank mergers such as Halifax/Bank of Scotland and RBS/Natwest. It is only if the present market study just happens to conclude in May 2015 with a decision by the CMA to proceed to a market investigation that there would be a window of opportunity for Miliband to follow through with his pledge. The CMA is independent and resistant to political pressure to determine its work other than in the limited range of statutory circumstances where ministers retain powers to order it to investigate. The timetable of the current investigation suggests that whatever happens, it won’t be November 2015 when we can expect a Labour government to deliver on breaking up the banks.

The other pledge made was that in looking at the sector, the CMA would be asked to set market share caps for banks. These already exist to an extent from the findings of the Competition Commission when it looked at the wave of mergers in the early part of this century. I spent too many hours looking at isochrones of travelling time and branch locations in working on getting the Halifax/Bank of Scotland cleared to think this a particularly novel idea! Given that this is clearly within the remit of the CMA in exercising its competition powers and using competition law and economics it is difficult to see how the CMA could devise a distinct public interest analysis which would not drive a coach and horses through its competition analysis of the impact of market share. Indeed the concepts of market share and market definition are matters of economics and competition law. The law can of course be changed, but the CMA would cease to be an investigation body expert in the relevant analysis were it to be required to trash its existing conceptual frameworks.

This brings us on to the final oddity in the speech. Miliband uses the word “competition” but actually doesn’t believe in it. At all. This might well be popular, but it is also rather Orwellian to co-opt the word to denote a set of policies which are inconsistent with it. If the proposals were to be taken on face value, they would risk failure because the answers which might come from the CMA would have a high probability of not being the answers that fitted the “reboot” of the market he wants. Then what would happen? Either the result could be proclaimed as a triumph, regardless of whether the CMA concluded what it had been asked to conclude, or it would be ignored and followed by legislation which went in the face of expensively bought expert investigation. A long time later.

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