It is time to end the oligopoly in banking

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The Co-operative has for several months been the preferred bidder for banking activities that Lloyds TSB is required to sell.

The Co-op is a British institution like no other. It originated in the 19th century, its goals political as well as economic. Its members aimed to undermine capitalism, particularly rapacious shopkeepers, by direct collective action. Co-op stores won a significant share of retail trade, especially in food and in the north of England and in Scotland. In the 20th century, however, the stores were often badly run and did not compete successfully with profitmaking supermarket chains. More recently, the movement consolidated into a single business and started to shake off its dowdy image, with particular strength in providing convenience stores in small towns and villages.

The Co-op also found a niche in financial services. Once again, the motives were partly political. The Co-operative Bank drew customers who disliked the ethics and behaviour of conventional financial institutions. It had some market success and is regularly near the top of surveys of customer satisfaction with their banks. The acquisition of a network from Lloyds would make it a significant force in UK banking. The plan has, however, run into regulatory problems.

The central issue seems to be that if the Co-op wants to be a bank, it must become a bank. It needs to put in place a capital structure and governance structure appropriate for a bank, impose a clear separation between the banking tills and the grocery checkouts, and recruit board members and staff with extensive banking experience.

Surely it is sensible that banks should be run by people who know about banking? Perhaps: though many people who claimed to know about banking ran their businesses into the ground. A group of amateurs might at least recognise that they did not understand what was going on and would not expect their ignorance to be rewarded with multimillion remuneration packages.

But this is not the main issue. If the only way you are allowed to operate a bank is by being much the same as existing banks, the only competition we can ever expect is the anaemic competition we see today. Banks differ in logos and fascias, but to customers they all appear the same. Since competition to provide an undifferentiated product already in excess supply is not an attractive business opportunity, little competition even of that feeble kind will emerge.

If you needed a licence to enter the US computer business, you can imagine the Computer Regulation Agency interviewing Bill Gates and Steve Jobs in the 1970s. What dutiful regulator would allow someone who had not even completed his Harvard degree to sell software to the public? Go and work for a few years in a firm like IBM, and recruit a board of experienced industry executives. But such regulation destroys the central dynamic of the market economy.

There is an argument that banking is different – though I could easily weave a horror story around viruses and Trojans to persuade you that unauthorised software was as dangerous to the public as unlicensed banking. If I were a lobbyist for established computer companies, I would elaborate that argument. You would need more self-confidence than most regulators, and more technical knowledge than most politicians, to refute me. Remember the millennium bug.

Still the argument that banking is different won historic acceptance, with the result that throughout the 20th century, we maintained stability in British banking through oligopoly, with minimal competition, no new entry and no banking failure of any significance. Perhaps that was a good bargain: but whether or not it was, it is a bargain that is no longer available. Now we have lost the assurance of stability, but experience fully the disadvantages of oligopoly – as any small business owner seeking a loan, or consumer answering the question “how satisfied are you with your bank?” will tell you.

Plurality and diversity are generally sources of stability – in banking as in nature.

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