Economics

Oligopoly at work in the UK banking sector

Tom White

25th September 2013

You don't have to look very hard at the UK economy before finding evidence of oligopolistic market structures. I've had a good look through the T2U archive and found several articles on the topic over the years. If you've already seen Geoff's excellent presentations - Unit 3 Micro: Oligopoly - The Basics and Unit 3 Micro: Oligopoly and Game Theory you'll perhaps be ready to use your grasp of theory to analyse the UK banking market.

I was prompted to write this blog after reading British banks - Cracking the oligopoly in The Economist. I've summarised the main points here:

For more than a decade competition regulators have worried that Britain’s banking oligopoly is ripping off customers, mainly by stinging them with high fees for overdrafts or late payments. So the re-creation of TSB bank will perhaps inject competition into a market that is among the rich world’s most concentrated. In mid-2008, just before the near-collapse of the global banking system, regulators worried that Britain’s four biggest banks had about 65% of the retail-banking market. Within months their slice had risen to about 75% as the government pushed through the takeover of HBOS, an ailing mortgage bank, by Lloyds TSB. The merged bank, renamed Lloyds Banking Group, alone had about a third of the retail-banking market.

The new TSB bank is being created through a spin-off of 631 branches from Lloyds Banking Group, Britain’s biggest lender when measured by domestic market share. The move was forced on Lloyds by the European Commission after it was bailed out by the British government five years ago in the midst of the financial crisis. In 2000 a government-appointed review had found evidence of “excessive prices and profits” in British banking because of insufficient competition. A succession of investigations since then has found much the same thing.

Making the market more competitive will be tough. The big banks have significant economies of scale. This is in both marketing (i.e. number of branches and brand awareness) and in technical areas: when potential bidders looked at buying TSB they reckoned they would have to spend hundreds of millions of pounds building new computer systems for the bank. The new TSB will use computer systems run by Lloyds. TSB reckons this is an advantage since it will enjoy some benefits of scale and also have access to new technologies such as mobile banking that Lloyds is investing in. Yet there would seem to be an equally pressing danger that TSB’s growth and competitiveness may be hampered by its reliance on a competitor.

I’ve put together a group of resources covering various price fixing and collusion scandals here.

Tom White

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