The Bank of Miliband

Over one hundred banks operate in the UK, however Labour party leader Ed Miliband believes that the ills of the UK economy in general and the banking sector in particular can be cured by the creation of two more. In his speech last Friday, Mr Miliband, when saying that banks had been poor servants to ordinary families and firms, was referring to the so called Big Five banks, in whom he believes too much power is concentrated. His desire is to see two new institutions to challenge the likes of RBS, Lloyds, Barclays, HSBC and Santander. In addition to the Big Five the UK has The Co-operative Bank, TSB (having separated themselves from Lloyds) while Williams & Glyn are to make a comeback on our High Streets, plus any number of building societies, credit unions and the like, such as Metro Bank, Virgin Money, Sainsburys Bank, Tesco Bank et al. It is not as though the public don't already have plenty of choice in financial service providers; the fact that these cannot apparently compete with the Big Five in a free-market economy is something which Mr Miliband believes a future Labour administration should address.

"There are five Big Banks; I know, cos I've counted 'em!"

 Should Labour win the next election, Mr Miliband says that he would instruct the Competition and Markets Authority (CMA) to report what limit of the market each bank should share and to prepare a time-table for the sale of bank branches, to be completed by 2020. The CMA  is responsible for strengthening business competition and preventing and reducing anti-competitive activities and Mr Miliband will ask them to decide upon "a threshold for the market share any one bank can have of personal accounts and small business lending." Banks exceeding this threshold would be forced to sell off branches.

Ed Miliband's inspiration for a cap on market share appears to be the system in place in the USA, but the US banking system is very different from the UK's. There are over 20,000 different banks in America, most are local, few are nationwide. For instance Alabama has over one hundred and eighty banks; New York state has over five hundred. The cap which Mr Miliband refers to relates only to deposits and is relevant only during proposed mergers; comparing the US and UK banking sectors is akin to comparing apples and pears. UK banks have been contracting their branch networks in recent years; the total UK branch network fell to 11,365 by December 2012, from 11,713 a year earlier. The banks have received heavy criticism for their programmes of branch closures, these proposals will enable banks to continue or accelerate doing so, immune from criticism on the grounds that they are merely complying with government policy. Despite what many people may believe, retail banking is expensive to maintain and not as profitable as other parts of the banks' business. Banks may see this as an opportunity to offload low quality or loss making accounts; in a worst case scenario these customers may find themselves unable to open accounts elsewhere.

Mr Miliband's speech was short on the specifics of how the five major banks (who hold 85% of small business lending) would actually reduce their customer base to meet these caps or how they would maintain their customer base having met the cap. Will banks be forced to close accounts? Presumably the idea is that the customers who hold their accounts at the branches that are to be sold will be encouraged to migrate to whoever buys them. Will banks, having had quotas imposed on them, have to turn customers away? If so it is difficult to see how this will improve competitiveness; customers will be faced with less choice and potentially be unable to open accounts at a bank they choose, but merely at one which has not yet reached its cap. The new Current Account Switch service, introduced to make it easier for customers to move from one bank to another, may become redundant if customers cannot move to their bank of choice.

 

Barclays have the most branches (1,593) in the UK

The challenger banks (Virgin Money, Metro Bank and the like), may not be the answer anyway. When Lloyds were trying to sell off TSB they ended up with two bidders. The Co-op won but pulled out after finding a large capital deficit. Who will bid for the branches that the Big Five are forced to sell? Tesco, if they are inclined to offer face to face retail banking, already have a potential network; their supermarkets. They have not built banking halls in their stores so how likely would they be to bid for excess branches that HSBC or Barclays are forced to offload? Virgin Money, although they bought out Northern Rock, are likely to prefer other banking channels (phone and internet banking) although they do have what they like to call Virgin Money Lounges; well, they have three, in Edinburgh, Manchester and Norwich. There has hardly been a stampede of foreign banks eager to enter the UK retail banking market, Citibank (the world's largest bank) and Handelsbanken have a limited presence.It may not be as easy as to find buyers as Mr Miliband believes.

If all else fails, bank branches can always be sold to JD Wetherspoon

Having proposed a cap on energy price rises and now announced his proposals for the banking sector, Mr Miliband has undoubtedly scored some popularity points with many of the electorate frustrated by above inflation price rises for their gas and electricity and, in the case of many small enterprises, similarly frustrated by the banks' reluctance to support their businesses. It remains to be seen whether, should Labour win the next election, they will carry these through. Every party, when in opposition announces grand plans for what it will do once it is elected; frequently these are significantly watered down (or quietly dropped altogether) once an election is won.

The Department for Business Innovation and Skills report that since 2008 SME's have found bank finance more difficult to obtain. Key reasons for applications being rejected include higher credit risk rating, previous financial delinquency and lower sales levels, i.e. the traditional reasons why banks refuse loan or overdraft applications. That said, it is sadly true these days that the traditional image of the bank manager who is able to make autonomous lending decisions is long gone and those decisions, especially for smaller businesses, smaller loans, are made by computer credit scoring models, not human beings.  As laudable as Mr Miliband's intentions to stimulate lending to SME's may be, the challenger banks would probably apply similar criteria to applications they receive. If they were to be encouraged by a Labour government to be less stringent they may find themselves with significant levels of bad debt, a situation I am sure Mr Miliband would wish to avoid, particularly if it resulted in some sort of government support being required to bail out the businesses or the banks; after all haven't we been in that position before?

In targeting the banks and before them the energy providers, Mr Miliband may have struck a chord with many who despise them both, but the City acted with the expected dismay. The major energy companies and the two banks who remain under state support (Lloyds and RBS) saw significant falls in the value of their shares following his announcements. The Institute of Directors, Business Secretary Vince Cable and Bank of England governor Mark Carney have all been critical of Labour's banking proposals and while Shadow Business Secretary Chuka Umunna implied that Mr Carney should not involve himself in political matters, it would be strange given his role as governor of the bankers' bank if he (Mr Carney) did not have an opinion on the matter; stranger still if he did not voice it.

Time will tell whether the banking reforms proceed and if they do, whether they achieve Mr Miliband's aims. First and foremost for Labour however, there is the little matter of winning the next election.