Earlier this month in Parliament I made the case for an overall cap on the size of banks in the UK, because I believed that banks may become too large to fail, or indeed to rescue. We also have a big problem with too little competition making it difficult, especially for small businesses, to get the service they need and deserve. Setting a maximum market share for each bank seemed a reasonable solution to these problems. Here is the speech I made proposing this idea, which was sadly not accepted by the Government or the Opposition!
Nigel Mills MP: “It is a pleasure to serve under your chairmanship, Mr Hood; it is a surprise that a substitute turned up during the Division.
I rise to speak to new clause 22, which was tabled in my name. I will prevent the Government Whip from having a heart attack on the Front Bench; I am not planning to press the new clause to a Division. I tabled it as a probing amendment to generate a debate. It would not be wise for a humble Back Bencher to write on the back of a fag packet something that could have far-reaching implications for the banking sector. We ought to legislate in a more considered manner. [ Interruption. ] The Minister is laughing; I am not sure whether that is because that is how some legislation gets drafted.
My reason for tabling the new clause is partly to address the issue of competition in the banking sector and partly to address some of the other objectives of this reform of banking regulations. According to my humble, non-specialist approach, we are trying to prevent another banking crisis, or reduce the likelihood of one as far as we can. We are trying to prevent the failure of one institution turning into a systemic crisis that takes down the whole banking sector—or perhaps the whole economy, as we nearly experienced. We are trying to get a better experience for the banks’ customers and to fix the moral hazard issue of banks thinking that they are too big to be allowed to fail.
The question that we must try to answer is that if we think that the banks have been too big to fail and perhaps too big to bail, what is “too big” and what are we going to do about it? In itself, ring-fencing will not stop banks from being too big, although it will perhaps have certain key advantages in the other objectives that I will set out.
The shadow Minister asked where 20% came from. I would not protest that I am some kind of scientific economist who can come up with empirical data as to why 20% is the right answer, rather than 19.5% or 20.5%—I accept that his challenge on that is quite reasonable. It was an attempt to find a sensible market share, in which we allow banks to be big enough to have a decent market share so that they can reduce their unit costs without their being so big that they dominate a particular segment of the market and cannot be allowed to fail. If the Minister said that he would accept the principle but wanted 21%, I would not argue the point too far.
It is worth looking at where we got to with our banks over the past decade or so. At the start of the 20th century, the three largest UK banks accounted for only 7% of GDP; by the middle of the 20th century that was 27% of GDP; and by the end it was 75%. A huge concentration took place. In 2007, the assets of the three biggest banks alone added up to about 200% of GDP—that was huge. That was not just a UK phenomenon. In 1998, the five largest global banks accounted for 8% of total banking assets; by 2008, that had doubled to 16%. So we have seen the consolidation right across the world.
It is not a new problem that has been identified since the crash—the 2000 Cruickshank report into competition in the banking sector concluded that there were real problems across all the banking markets and that personal and business current accounts were too highly concentrated in UK retail banking. We have had that information—that we have a problem—around for 13 years now. The OFT looked at it in the early years of this Parliament and it has been considered by the Vickers report. The Parliamentary Commission on Banking Standards is still to publish its view on competition, but I think we will hear some robust recommendations. I am not convinced that it will go quite as far as I have gone with a cap, but we need to get this issue right.
Things have clearly only been exacerbated by what has happened since the crash. We have had 14 separate mergers since April 2008. Between them, the five biggest banks now have 85% of personal current accounts, and the four biggest banks have 78% of the business market. We clearly have a problem. On Second Reading, the Minister posed the question:
“how can Britain be one of the world’s leading financial centres without exposing ordinary working people in this country to the terrible costs of banks failing?”—[Official Report, 11 March 2013; Vol. 560, c. 36.]
I pose the reply: one way is to stop the banks getting so big that they cause a disastrous failure. The Minister later went on to say that he strongly believed that “the concentrated nature of the UK banking industry is unacceptable” and that he wanted “to see far greater possibility, and indeed reality, of entry into the market”—[Official Report, 11 March 2013; Vol. 560, c. 46.]
by new entrants. Clearly, having some kind of cap on how big our banks can be would be one way of saying to new entrants, “Yes, we want you. Yes, the assistance is there, but you cannot be forced out again by enlarged players doing their various tricks to try to squeeze the market—there will always be a decent-sized market for smaller banks across these key sectors.”
I do not think that I got new clause 22 perfect, but I was trying to find a sensible theme for us to talk about, so I set the start date as 2020. It is not as if I was suggesting that on Royal Assent, all of a sudden Lloyds—I think it is the only banking group currently in excess of 20% in any of these sectors—would immediately have to dispense with part of its business. Ring-fencing is timed to come in towards the end of the decade, so it would make sense to bring in all these provisions at the same time.
I also tried to deal with what would happen if a bank dropped out of the market and we ended up with an unexpected concentration, or whether a bank that found out at the end of the year that it had crept over the 20% threshold would immediately be in some kind of penalty situation. I was allowing a year’s grace—a bank would have to breach for two years before any action was taken, so a bank that did that had time to take some remedial action.
The situation now is that, even after the forced divestment from RBS and Lloyds, Lloyds will still have 25% of the personal current account market and 21% of unsecured personal loans. In small business banking, Lloyds has 21%, RBS 24% and Barclays 18%. In some sectors there is too much power in the hands of too few banks.
It is worth considering in principle whether that situation is right for a sector so fundamental to the UK economy. Is it an exception in respect of which we should go for some strong market-controlling regulations, such as a cap? For most in my party, a market-size cap would be the last thing that we would want to do. However, this is probably one of the most important sectors for the UK economy. We are saying that we want more competition. We are saying that banks can be so big that they present a danger to the whole economy of the country. Perhaps it would be right for Parliament to put a limit of 20% on how big those banks can be. In the context of my new clause, I would happily accept a slightly different number.
We face the fact that the Competition Commission is reviewing the matter by 2015, but I am not sure that we want the Competition Commission to be driving the process. Perhaps, in the light of the crisis, it is for Parliament to say that we accept we need big banks because they can give the lowest cost and the best value, that we want strong banks, that we do not want a collection of 19th-century-style tiny banks in every town, and that we think 20% in each of the key core banking sectors is large enough to prevent risk and damage to the economy as a whole or to individual customers through poor, fraudulent or exploitative service.
The arguments on competition were well rehearsed by the shadow Minister so I do not need to go through them again. However, I thought we should have a debate on a specific proposal, rather than a request for yet another review. There have been so many requests for reviews in Committee, but I am not sure we have accepted any of them. I think it is better to discuss a suggestion about how to improve the situation.”
I was convinced that the overall regulatory framework proposed by the Government will afford sufficient protection to the economy, and subsequently withdrew my amendment.