Thursday, September 18, 2008

Future of Banking in UK

Readers Question: (James) What kind of measures do you think the competition commission will be willing and able to take in the long term, after confidence has been restored and steady growth returns? Are there any comparable cases of the competition commission 'forcing' a large company apart?

The merger of HBOS and Lloyds TSB means one less high street bank, and a firm with monopoly power (30% of market) Basically, I expect the banking industry to remain less competitive for the foreseeable future.

As far as I know, the Competition Commission (and its predecessor the MMC) does not have a track record of forcing companies to split up. The Competition Commission is focused on deciding whether mergers are in the public interest. They can make recommendations before a merger. For example, they allowed Morrisons to buy Safeway on the condition of selling off some supermarkets. However, their remit does not involve breaking up existing monopolies.

One case, that I do remember is the Office of Fair Trading, after a report by Competition Commission required Interbrew to get rid of some parts of its business in 2001. Basically, interview bought Bass brewers in June 2000, and in January 2001 OFT said they need to sell off parts of its business. BBC link  

The OFT, can investigate firms who 'abuse their dominant market position'. or engage in unfair competitive practises (e.g. predatory pricing). But, these can be difficult to prove. A recent investigation into supermarkets by the OFT, basically said they were fine.

Could Lloyds TSB HBOS be Broken Up in the Future?

With 30% of the market share in Mortgages and savings they do present substantial monopoly power. British consumers will be less worse off by the deal, it will be easier for Lloyds / TSB / HBOS to charge higher rates to borrowers and lower rates to savers. This will be a particular problem during the continuation of the credit crunch.

It will be difficult for the competition commission / OFT to act retrospectively. It would need a change of legislation to break up monopolies like that. It may be a populist move with the general public, but, it would leave a bitter feeling amongst Lloyds TSB. In a way they are doing the government a favour by buying HBOS, - I wouldn't be surprised if Gordon Brown somehow gave a guarantee that the merger would not be challenged in the future. How binding this agreement would be it is difficult to say.

The Winner is - Lloyds TSB

Lloyds TSB will be very happy with this development.

  • They wanted to take over Abbey in 2001, but, were blocked by the Competition Commission because it would have reduced competition (As it is the HBOS merger creates an even bigger company.
  • They bought HBOS for a low price 232p. If the credit difficulties are eased, then it is worth remembering HBOS / Halifax has a very profitable commercial bank. E.g. in 2006, HBOS made £4.3bn profit.
  • Even in the very unlikely situation they were forced to sell off parts of the business (when the crisis has passed) I'm sure, they would be selling at a profit. The buying price of 232p reflects the uncertainty of current difficulties. When (if) these are removed, it looks great value.


James said...

Thanks a lot for the quick response.

It looks like the new "super-bank" will remain a very big topic for years to come, and especially if Brown actually has made the kind of agreement you mentioned: I'd also say this is quite possible considering the information that Gordon Brown and Sir Victor Blank personally met to discuss the matter in advance (see

Tejvan Pettinger said...

The thing is I doubt Brown will be around for much longer, so its not surprising he wanted best fix in short term.