The timing of Ed Miliband’s intervention on bank competition is interesting, because it’s not that there’s much disagreement in Parliament about the need for more competition, it’s that he’s made a quicker judgment that the policy of competition is actually more achievable now than it has been during the course of this parliament.
First, if government is to force the splitting up of the banks, then there has to be willing buyers, and that has been uncertain for most of this parliament. The sales of Northern Rock at a deep discount, the collapse of the sale of RBS branch and the difficulty of finding someone to buy the TSB branches all warned politicians that it might be difficult to achieve a break-up in practice.
Secondly, most voters remember that the collapse of the banks followed the previous period of intense competition of the mid 2000’s: mortgages were offered at Bank of England base rates plus a tiny fraction of a percent. The term ‘too big to compete’ is how this problem is now understood, it’s a phrase that featured in the Tyrie Commission discussion about competition, and recent academic research has shown that competition in developed market banking tends to weaken the banks.
Ed Miliband’s judgment on breaking up the banks must be based on two new facts: first that the stock market’s attitude towards owning banks has swung from deep dislike back to a recent new-found love affair, and that post the bail-in of the Coop bank, the regulator has the powers to make sure competition doesn’t make the banking system more dangerous.
The slowdown in the economy from Q3 2010 decimated bank share prices. The share price of our leading retail bank, Lloyds Bank, fell precipitously from 70 pence in August 2010 to a low of 21 pence in November 2011.
Since then, the shares have been rallying, doubling in 2012, and then rising a further 50 per cent in 2013. They are now quoted at 84 pence. And since the rights issue by Barclays, and the sale of Lloyds shares last autumn, policy makers should be more confident that the stock market will buy a the branches from a bank being broken up.
The forthcoming TSB share sale will provide further evidence for whether there are further investors in challenger banks.
But that still doesn’t address the too big to compete fear. What will give further confidence to policy makers to pursue the break up of the banks is that if systemic risk starts with the riskiness of an individual bank, then politicians can point to the Coop bank restructuring as evidence that, the regulator now has the powers and process to intervene much earlier.
It would be a mistake, however, to think that this will be a dividing line for the major parties in the general election. While we’ll get a tit for tat today on who was weaker on bank regulation in the 2000’s, that merely shows that politicians of all stripes have had damascene conversions on their attitudes to the banking sector.
Parliament wants more competition and better service in banking; the Tyrie Commission is quite clear on that. Ed Miliband’s intervention is an important sign of the reassessment of the achievability of that outcome through a break up of the banks.
This post first appeared on Left Foot Forward.
