MPs back 'ring fencing' of retail and investment banking
The Treasury select committee's conclusion that there is inadequate competition in retail banking would be embarrassing at any time for the UK's big banks.
Because in reaching this conclusion, the MPs on the committee accuse Barclays, Royal Bank of Scotland, Lloyds, Santander and HSBC of not giving customers adequate information about the costs of current accounts that would allow those customers to make a simple, rational assessment of whether to take their business elsewhere.
And the MPs say the process of switching banks remains too cumbersome and daunting for most of us.
Probably all you need to know is that a maximum 9% or so of retail customers move their current accounts in any year, and the more relevant figure - when adjusting for what consumers do with relatively unimportant second or even third accounts - may be as low as 3% per annum.
By comparison, more than a quarter of customers each year switch providers in telecoms, energy and even credit cards. And, believe it or not, the energy regulator believes there is too much inertia in the gas and electricity market, so goodness only knows what he would make of what goes on in banking.
The current account market does not seem to be one in which we shop around for the best deals, partly because the deals on offer look the same - though in practice the complexity and opacity of charges means we can end up paying vastly different amounts at different banks for identical transaction patterns.
And since current accounts are the gateway to so many other financial services, MPs see the big retail banks as operating in a cosy, protected world.
An assessment, included in the select committee's report, by John Fingleton, director general of the Office of Fair Trading, is particularly damning. Mr Fingleton said that the banking industry is:
"Clearly much less competitive than a lot of the sectors we look at. In huge sectors of the economy - retailing, distribution, airline transport, and so on - we see high levels of competition, innovation, costs coming down and no real difficulty in firms earning a profit for their shareholders and managing to pass on low prices to customers - (firms) being very innovative in the process and driving up productivity growth in the economy. That picture does not characterise the banking sector."
One part of the report is a comedic must read: it recounts bankers' obfuscating answers to questions about whether it is possible for consumers to know how much they're really paying for current account services. Here is a flavour:
"Ms Weir (Helen Weir, the departing head of retail banking at Lloyds) seemed confident that consumers would know the cost to them of operating a current account, telling us that 'most consumers would have a pretty good idea of what they are paying for their current [account] banking.' However, when we pressed her to say how much she paid in terms of interest foregone herself, she was unable to answer."
What's the answer?
Well the MPs want the soon-to-be created new financial regulator, the Financial Conduct Authority, to have a primary objective of promoting competition. And they urge that the eventual privatisation of taxpayers' stakes in Lloyds and RBS should be carried out in a way that serves the public interest in respect of its impact on competition.
But funnily enough, none of that is what will really worry RBS, Barclays and HSBC. Much more disturbing for them is that the MPs on the committee - who are from all the parties - say the mega banks have an unfair advantage as a consequence of their sheer size and importance to the British economy, which makes them too big to fail, always rescued by taxpayers in a crisis.
As too-big-to-fail institutions, the big banks can borrow more cheaply than smaller banks, because creditors know their loans are in effect guaranteed by taxpayers (yes I know I've been blathering on about this in a rather repetitive way for months - sorry).
And this perception that the mega banks can't possibly go bust is also an enormous reassurance to ordinary depositors and savers - which is another competitive advantage they have over banking newcomers and tiddlers.
So the MPs say they are pleased that the Independent Banking Commission, set up by the Treasury, may propose that banks put strong firewalls between their retail and investment banking operations - which would allow one part of a mega bank to fail without needing to be bailed out by the state.
Such a reconstruction of giant banks would, the MPs think, go some way to addressing the too-big-to-fail problem and have benefits for both financial stability and for competition.
Which is the last thing the banks themselves want to hear. They are bitterly opposed to the idea of putting their investment and retail arms in separately capitalised subsidiaries, fearing that would lead to a massive increase in their costs.
However the statement by the MPs that they are "encouraged by signs that the Independent Banking Commission is already considering ring fencing as a possible solution" rather implies the mega banks may have already lost what they would see as the most important part of the argument about their future.