When Metro Bank was set up in 2010, it was the first time in 150 years that a new company had been granted a banking licence. Many of the problems in the banking sector derive from a lack of transparency, choice and competition. The number of major UK banks fell to 22 in 2010 compared to 41 in 2000 and the Big Four (HSBC, Lloyds, RBS and Barclays) until recently maintained almost 80% of the retail banking market share. There has been some progress over the few years but it has been nowhere near enough.
This concentration helped to create that awful phenomenon of banks that are too big to fail. Increasing retail banking competition would give consumers greater and better choice and drive banks to provide improved products and services. The new Current Account Switching Service reduced the time it takes to switch accounts to 7 days from between 18 and 30 days. This has seen an increase of 19% in switching in the first year of its introduction but still only 2.2% of current account holders actually switched. Cutting switching times is therefore important in empowering consumers.
Boosting banking sector competition should also entail reducing barriers to entry and easing the path to exit without causing systemic problems. Licensing laws should continue to be liberalised so that new entrants do not face onerous requirements. The BBA estimates that it can be up to 8 times more expensive for a smaller bank to give someone a mortgage than for a bigger high street competitor.
Some reporting and capital requirements on new, small banks should be eased to reduce the cost of maintaining a presence in the market. For example, new entrants are obliged to hold a minimum of £1 million in capital compared to £5 million in the past. Reducing the amount of capital required for certain loans would help to ease the process of entry. Allowing more flexibility in the risk weighting of loans could be done, for example, by allowing new banks to use averages of the bespoke weights used by big lenders. This would boost lending as well as the ability of Challenger banks to compete with existing market participants.
Challenger banks should also be allowed to share credit risk data.The big existing banks already have a lot of information on the credit risk of SMEs through access to current account performance data. This puts them at a distinct advantage to challenger banks who want to offer SME banking products. Allowing much greater flexibility in credit risk data sharing would therefore allow a more level playing field when it comes to the provision of SME banking products. In addition, local authorities should be allowed to use smaller banks, thereby opening a new market for Challengers.
Massive taxpayer funded bail-outs of the banks can never be allowed to happen again. Ensuring that the barriers to competition and contestability in the banking sector are removed is one way to help make sure bail-outs are never again needed.