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New report: Boost bank competition

    Competition in the banking sector has been too weak for too long – and must be strengthened, writes Andrea Leadsom in Boost Bank Competition, published on Thursday 31 March by the Centre for Policy Studies.

    Andrea Leadsom, MP for South Northamptonshire, a member of the Treasury Select Committee and a former finance professional herself, argues that:

    • One of the causes of the recent financial crisis was the absence of real competition in the banking sector --- in particular, market concentration hindered the free entry and exit of banks.
    • The proposed Financial Conduct Authority (FCA) should be given a specific competition objective to seek ways to remove barriers to entry (promote new competition); to take steps to permit the orderly exit of failed institutions (break up institutions that are ‘too big to fail’); and to ensure products and services offered are themselves subject to competition.
    • To fulfil this aim, the FCA should establish a Financial Competition Commission (FCC) that would carry out investigations of individual firms or of product areas. The FCC would make recommendations to the Bank of England to promote competition between banks. The Bank of England would have the authority to enforce such recommendations.

    Writing ahead of the interim report of the Vickers Commission (due on 11 April), Leadsom concludes that such reforms could result in a profound cultural change in the banking industry. Over time the focus on competition would improve customer service, restore free market principles to an industry which is of crucial importance to the UK economy – and may even reduce the risk of bank failure and the need for the implicit taxpayer guarantee.

    The full report can be downloaded from here.

    Date added: Thursday 31st March 2011