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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 27.

    Banks have no desire to compete. Take Sterling to Euro FX payments. Banks deduct a couple cents as "commission", then charge an additional transaction fee. Its "set in stone".

    FX Companies are booming. Why? They compete & offer a very good deal (fraction of a cent & no fee) that Banks refuse to compete with. So, what do Banks do? Remain uncompetitive & find another way to rip off Customers.

  • rate this

    Comment number 26.

    Labour (and Mr G.Brown in particular) had a policy of "doing nothing" when it came to bank regulation. They actually made of specific point of "doing nothing", it was their actually policy.

    So now they propose to sort the banks out.

    Yes again, Labour are now saying they are going to fix a problem that they created in the first place. Isn't that good of them ?

  • rate this

    Comment number 25.

    Under Labour Basle II was put out to dry, meaning the banks could do whatever as long as they fueled with credits "Growth" for Labour. There was no control and then when all failed and banks had to merge Labour did not put brakes in place. Why take comments from a person (Miliband), who has no ideas of finance and helped sell off Gold at the lowest price in years to finance elections ??!

  • rate this

    Comment number 24.

    12. "When were you going to tell us the NHS was privatised?"

    It is not being privatised. Funding is still; beign rpovided by the sates and services are being outsourced. This is a common model in Germany, France and the Scandi countries. In France 70% of its health services are outsourced & whilst France is largely broken its health servcies are better than the UKs.

  • rate this

    Comment number 23.

    We have never had a sensible explanation why the traditional Building Societies started to de-mutualise in the 90s to be exterminated by the big banks with the blessing of our useless politicians.

    Competition, too ethical, asset grab, small and efficient is unfashionable; are just 4 possibilities that spring to mind?

  • rate this

    Comment number 22.

    Another long standing problem that Labour now promises to fix despite ignoring it for a decade when in power.

    Judge politicians on their deeds - not their words, which have about as much credibility as AAA ratings for sub-prime mortgage bonds.

  • rate this

    Comment number 21.

    We, the depositors, if we could act together, would have total control of the retail banks.

    They are in hock to us for more money than exists as cash. Under a collective threat to close our accounts, the banks (and UKgov) would have to organise themselves and act however we told them.

  • rate this

    Comment number 20.

    This is a terribly written article. Peston's writing is truly partial and inappropraitely skewed. For a supposed business commentator he seems to have a profound misunderstanding about the ways that businesses operate.

  • rate this

    Comment number 19.

    You refer to the banks' leading role in the 2008 "financial calamity".
    Undoubtedly, that was the eventual trigger for recession but you appear, conveniently, to have forgotten that the whole edifice of unsustainable state borrowing and consumer credit excess had been mismanaged by government - in the UK by your chums Brown and Balls. Could we, please, have some balance in reporting.

  • rate this

    Comment number 18.

    As a close ally of Labour, should you not declare an interest in tacitly supporting Ed Milliband's efforts to deflect attention from his lack of economic credibility via a bit more bank-bashing? Oh, and your implicit criticism of Mark Carney sits uncomfortably with your apparent claim to technical expertise on banking systems.

  • rate this

    Comment number 17.

    If people want competition they should change their bank.

    We have been told time and time again how difficult that it - total rubbish. I changed banks 10 years ago. It was simple then, we DDs followed the change, the system is still the same

  • rate this

    Comment number 16.

    Just more hot air and meetings ,the cartel wont allow any changes that would hamper their ability to hold the country to ransom.

    the only people who can push change are severing the Banking / Parliament link , will it happen ? not in my lifetime for sure ,infact we are more likely to see our right to vote removed first....thats how powerful these people are.

  • rate this

    Comment number 15.

    @12 - I agree. The BBC's non-coverage of stealth NHS privatisation has been shocking.

    Anyway, back on topic, please break up the banks. They have become too big and powerful. Gideon won't do it though.

  • rate this

    Comment number 14.

    It's the UK's misfortune that its biggest (some would say only) industry of world-wide significance is banking, and that it happens to be a malignant, unprincipled, influential and malevolently predatory business that will destroy anything and anybody who stands between it and a dodgy deal. Good luck to the regulators. They'll need it.

  • rate this

    Comment number 13.

    We all hang on every word the Labour party who completely ignored the banks for 13 years say...........not.

  • Comment number 12.

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

  • rate this

    Comment number 11.

    Wee Scamp: 'You don't change the culture of a bank by breaking it up you do it by killing it off and starting a new one run by people that actually understand the needs of the country.'

    The people currently running the banks understand exactly the needs of the country. Unfortunately they consider them less important than their own needs.....

  • rate this

    Comment number 10.

    It will be tough, but it needs to be done.

    The banks' favourite argument, about their disproportionate contribution to the economy, is actually the strongest argument against them.

    We should be focussing on industry - be it automotive, renewables, medical, IT/Telecoms, aviation, defence, food, infrastructure.

    Things that provide a useful outcome and lots of high grade employment, countrywide.

  • rate this

    Comment number 9.

    3. John_from_Hendon : "Remember: if ANY business is "too big to fail" it is too big to EXIST."

    I agree John. However I feel that TBTF represents not the business itself, but *other people's behaviour and reliance on it*. Ideally we would remember what you've posted, remember that businesses are (and must be) fallible, and ensure we have a contingency plan.

    Then nothing is TBTF.

  • rate this

    Comment number 8.

    Let them go broke should be the right answer but unfortunately will not work anymore. What we now suffer from is a cultural and sociological problem of moral deficit that threatens to collapse society in on itself. If we are to avoid the fate of the Roman empire and others systemic change is required to avoid social ,economic and ecological disaster. We owe it to our chidren to at least try.


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