Banking Industry under Competition and Regulatory Spotlight

It has been a busy week for the banking industry. The first big news was the publication of a comprehensive health check of 130 large European banks by the European Central Bank, which was commissioned in response to the sovereign debt crisis in the Eurozone. Brussels lauded the latest investigation as the most intense scrutiny that European banks have ever been put through. 

The result was a good one for UK banks. Although 25 European banks failed the ECA/ECB stress tests, none of the offenders were British. Lloyds caught the nastiest shock under the most extreme scenario and has been left with the weakest capital position of the big four, but it still passed.

Over the last three years, UK financial firms, in conjunction with the FCA, PRA and Bank of England, have done a lot of work to define tough but fair stress test conditions and worked hard to get their regulatory houses in order and their compliance processes ship shape. The experience, knowledge and maturity of UK financial services organisations (both in terms of institutions and authorities) means that the whole sector has been taking capital adequacy extremely seriously since the 2008 crisis, so the ECA/ECB stress tests have not proved to be a significant obstacle to UK banking operations. 

UK banks, however, have not escaped so lightly from the Competition and Markets Authority scrutiny. The CMA has ended a five month consultation with the announcement of an investigation into the so-called stranglehold the big four banks have in the UK (they count for more than 75% of UK bank accounts). In particular they will be looking at the proliferation of high street networks and free bank accounts as being the prime barriers to entry for new entrants.

Initiatives like the drive for 7-day account switching, making it easier for consumers to switch their bank, have had little impact. So it’s likely the CMA will be looking at deeper, more structural changes that will boost competition. The big four are quaking at the thought of further divestment and a diktat to sell off branches and swathes of their customer bases. Lloyds and RBS have already been forced into significant divestment programmes.

And of course, divestment is a massively expensive and complicated exercise. Forcing banks to go through divestment programmes can have a significant impact on their business – shareholders don’t like it, employees aren’t comfortable with it and customers are disquieted by it. Is forcing divestment upon banks the right way to stimulate competition in the banking sector? Only time will tell, but if banks are forced down the divestment path, a strategic approach to the separation of processes and systems is key to lessening the impact of such a blow to the business.