Myths and reality of the bank shake-up

Allister Heath

AS predictably as day follows night, the myth-making machine spiralled out of control again yesterday. Perhaps the biggest is that the UK banking system is uniquely concentrated. As Citigroup research reveals, this simply is not so: overall UK banking system concentration (using the World Bank’s measure of assets of the biggest three banks as a share of total bank assets) is about 60 per cent, similar to the average across Europe, some way above the US and Japan but well below the highest countries (Belgium and Sweden are both above 90 per cent on this scale). Australia has similar levels of banking concentration to us yet did not suffer from any of our problems, thanks to prompt action by the central bank to pop the housing bubble.

It will certainly be mildly amusing, courtesy of the EU, to have Cheltenham & Gloucester, TSB and Williams & Glyn’s reappearing as standalone businesses (the latter, for younger readers, was an established name in the 1970s and early 1980s before being subsumed into RBS). But it won’t really have any impact on credit availability or interest rates. These are determined by central banks, the credit markets, capital ratios, delinquency rates, house price changes and overall economic conditions; and regardless of these, larger banks are generally able to undercut their smaller rivals which have higher overheads per customer.

The likes of Tesco and Virgin will make more of an impact, however, but not when it comes to margins or interest rates: they might infuse some real customer services into the financial services industry, with longer opening hours and customer-focused innovation. This would be great for customers sick of the traditional 9-5 culture.

There were plenty of other myths being peddled yesterday. Not all banks are being bailed out again, just two (and primarily one); Stephen Hester, RBS’s boss, is not to blame for any of his firm’s inherited problems and has been treated shabbily by Brussels; the fact that most staff at RBS and Lloyds will have their bonuses paid in shares, not cash, this year is not proof that the government is adopting Tory plans (these would have also applied to HSBC, Barclays and other high street lenders that were not bailed out).

What is undoubtedly true is that the taxpayer is shelling out again and that this is a scandal. However, the extra help to Lloyds – in the form of the government taking up its share of the rights issue, worth £5.8bn – isn’t that steep, especially given that the Treasury is also pocketing a £2.5bn break fee. Taxpayers will suffer less than if Lloyds had remained in the asset protection scheme. The government ought soon to be able to offload some of its equity onto the market if it were to wish to do so, hopefully at a profit; I am sure the taxpayer will get its money back with interest on this latest hand-out.

The situation with RBS is another matter. Of the £25.5bn of taxpayers’ money being allocated for new “B” shares, £13bn is upfront capital, £6bn is capital RBS can draw on if needed, and £6.5bn will be a fee taken as capital. And then there is the asset protection scheme: if RBS’s assets turn out bad, the taxpayer will be left carrying the can (though I suspect this part won’t be as bad as the pessimists fear). But thanks to the incompetence of Sir Fred Goodwin and all the private and institutional investors, analysts and media commentators who cheered him on, RBS is one investment that is unlikely ever to repay taxpayers in full.