How to break up banks

Banks in the City of London

The Labour leader's plan to ask the new Competition and Markets Authority (CMA) to investigate whether there is adequate competition between the UK's big banks is a pretty alarming prospect for those banks.

They will wonder whether there will ever again be a time when they are not being crawled all over and under by assorted regulators, investigators and commissioners.

Just in the opening years of this parliament they have been probed in a comprehensive sense by an Independent Commission on Banking and a Parliamentary Commission on Banking Standards, and in a narrower way by the defunct Financial Services Authority, the Serious Fraud Office, the Financial Conduct Authority (FCA), the Prudential Regulation Authority and assorted official bodies all over the world (almost too many of them to mention).

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Business as usual for banks is to be permanently under investigation, and will remain that way for years”

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It is no longer appropriate to say that business as usual for banks is prevented by all the uncertainty - about their respective structures or cultures or size - created by the assorted investigations. Business as usual for banks is to be permanently under investigation, and will remain that way for years.

That is a price they have paid for their sins in the boom years, and their leading role in the 2008 financial calamity that hobbled all the leading western economies.

Of course it is a price that we pay too, in bank share prices that may be a bit lower than would otherwise be the case (we own the semi-nationalised banks as taxpayers, the others through our pension schemes).

But, interestingly, customers do not appear to be picking up any kind of bill, or at least not yet. Arguably all this scrutiny has forced the banks to be a little more assiduous when it comes to customer service, and less ready to rip us off when we're not looking.

So what should any review of the banks by the soon-to-be created new super competition regulator focus on?

Well, although it is a bit embarrassing for Ed Miliband that the governor of the Bank of England, Mark Carney, voiced scepticism yesterday that competition would be significantly enhanced by breaking banks up or forcing them to slim down, he would never claim to be a competition expert.

Ed Miliband The Labour leader, Ed Miliband

So although his writ runs more or less everywhere in the financial world and economy, perhaps on this he should not be seen as the oracle.

As the Independent Commission on Banking said in its final report, it would be legitimate by 2015 to examine whether the divestiture of TSB by Lloyds has created a strong new competitor, whether it has become significantly easier to switch banks and whether the FCA is "demonstrating progress to improve transparency and reduce barriers to entry and growth by rivals to incumbent banks".

But there is one important issue about the structure of banks which is both fundamentally important and has been largely ignored in recent years - which is whether the biggest barrier to proper competition in banking is the big banks' ownership of the payments system.

Funnily enough, it was an investigation by the last Labour government some 15 years ago - commissioned by Gordon Brown and carried out by Don Cruickshank - which characterised the payments system as a utility that ought to be regulated in a formal and intrusive way on a permanent basis.

Cruickshank recommended that a specialist regulator should be created to set the price for using the payments system to ensure that all banks had equal access to it on non-discriminatory terms.

The government said it agreed with him, and then - over a period of many years, after further reviews and consultations - did very little about it.

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The payments system is huge, creaking and inefficient, built on layer after layer of obsolete computer systems”

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When I talk to those running banks big and small, they say that the competitive playing field could be levelled in a significant way, if the payments system became an independent, price-regulated utility, available to be used on equal terms by all authorised banks, whether big or small.

Or at least they do, when not suffering from a panic attack at the putative logistical challenge and cost of de-merging all the software and hardware and people.

There is another argument for creating a separate regulated payments network - the equivalent for banks of the National Grid - which could be seen to be in the big banks' interests.

The payments system is huge, creaking and inefficient, built on layer after layer of obsolete computer systems, which may never be overhauled as thoroughly as may be necessary, if banks can get away with patching it up.

In an internet world, it looks like a steam engine. A proper regulator might force banks to invest the necessary sums to turn it into a diesel engine, at the least.

Why the need?

Well for me, perhaps the most interesting thing about modish bitcoin - the online money - is that it is perhaps the first monetary system that makes no use at all of banks' transmission systems. Bitcoin, among other things, is a frictionless, costless way of moving money all over the planet.

Bitcoin is an existential challenge to the banks. But that is a story for another day.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

This column...

This column may be a bit quiet for a bit, because I am away from the office.

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  • rate this

    Comment number 147.

    Financial Services are a global industry requiring strong players to prosper. Labour is taking a parocial UK view which will limit the ability of our Banks to compete. Banks pay significant taxes to the Treasury. This proposal will reduce payments. Labour will have to increase taxes or increase the "levy" paid by the Banks - which will further reduce their competiveness. Unintelligent.

  • rate this

    Comment number 146.

    "bitcoin - perhaps the first monetary system that makes no use at all of banks' transmission systems"???
    What about NatWest's Mondex - the best and still unsurpassed digital cash system. An unaccounted system - just like cash - making no use of the banks' transmission system. If only the banks had out aside their differences and if only the UK Goverment had mandated its use...........

  • rate this

    Comment number 145.

    Isn't it time to give the banking industry some stability. What good can come of this announcement now, when the gov' is looking to claim back some of our stake in Lloyds.
    The labour party in-part created the banking mess and now they want to make it worse via a cheap, poorly thought through vote winner.

  • Comment number 144.

    All this user's posts have been removed.Why?

  • Comment number 143.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 142.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 141.

    Investment Banks should stand alone and fail if they do not invest wisely. It is basically greedy people who want to get rich quick, no different than gamblers in a bookmakers.

  • rate this

    Comment number 140.

    Interesting what comes up on Google when you type in "mps who became bankers" or vice versa

  • rate this

    Comment number 139.

    RBS is a basket case I see it still has £38 billion in it's bad loans book. This is even after Stephen Hester reduced bad loans by a significant amount. The potential losses could still be too big even for the government. If it could be flogged off it would have been done by now.

  • rate this

    Comment number 138.

    Would like to know if is true that the Politicians who decided to abolish Slavery,paid out millions of pounds in Compensation?
    And if that money ended up in the Bank Accounts of the slaves,or their masters.?
    And which Political Party should be ashamed of subsidising some very rich people?

  • rate this

    Comment number 137.

    136. Movetoslovenia

    Remember transaction charges, account fees, no interest on current accounts, 5 day clearing.

    Sorry If Thatcher was involved, she wasn't much, then its a success.

  • rate this

    Comment number 136.

    Remember all the banking and building society mergers of the 80s, another great Thatcherite policy gone wrong, may her soul rest in hell

  • rate this

    Comment number 135.

    I think we should look at what constitutes competition. Perhaps someone should compare what the UK consumer pays for banking compared to the rest of the world.

    How will playing with a high street that is largely redundant make a difference

    What cost could be taken from a transaction sits with the card alliances. But Government largely has no control.

    Labour has no clue!

  • rate this

    Comment number 134.

    a robot phones you up...asking you to rate how the cashier lived up to your expectations of perfect service!
    Sad to say I just rung off in COMPLETE DISGUST.
    Don't hang up - just put park the phone on mute and let the robot garble on to itself. In fact I am might with an app which pretends to answer the questions in time and send robot into a loop. .

  • rate this

    Comment number 133.

    If the big 5 banks are forced to cut their market share that means offloading accounts.
    Which accounts does the REdster think will go? Medium to high earners?

    Of course not.

    It will be the poorest who are hit when their accounts are taken by smaller banks with higher lending charges.

  • rate this

    Comment number 132.

    We just need one HONEST bank to pay HONEST interest rates.
    Without snide & stealth included in the small print...

    And the annual IR clearly printed on top of the statement

    And... Guess what!

    They may just capture 90% of the UK savers!

  • rate this

    Comment number 131.

    "Still if we didn't bash the banks we would have to ask difficult questions about who was to blame for the crisis"


    Domestic and even govt debt didn't cause the crash of 07/8.

    It seems entirely reasonable to blame the hyper rich, out of control City and Wall St crowd who drove us over a cliff and kept all the loot - and are now richer than ever

    Always follow the money - & they took it

  • rate this

    Comment number 130.

    and the latest RBS travesty...
    a robot phones you up the next day after you have visited the bank asking you to rate how the cashier lived up to your expectations of perfect service!
    Sad to say I just rung off in COMPLETE DISGUST.
    How much did the software of that cyberassault cost?..
    If that is the future of banking there's no hope
    I rate RBS itself 1 on a scale of 1 to 7 where 7 is good....

  • rate this

    Comment number 129.

    No one is asking Carney the right questions.....which is are the banks we already have supplying money to SMEs?
    And the answer is NO.
    And the next question is HOW can the BofE CHANGE the banking
    system to ensure that business finance is available.
    However if Dave and George think reelection depends on the historic Thatcher/Blair/Brown plan of housepriceinflation, they are pathetically mistaken.

  • rate this

    Comment number 128.

    National Grid....big six ripoff at taxpayer's expense.

    National Money Movement...big five ripoff at taxpayer's expense.

    Once again, the taxpayer paying to update the banks creaky software.
    OK RP, the software needs updating but let the perpetrators pay, after the bonus £600m ripoff at RBS last year...still no dividend and the bank made a loss..the NHS software debacle has cost taxpayers bns.


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