A golden opportunity to reform the Scottish banking market

Whatever the referendum result on September 18, the Scottish banking system needs reforming and the Scottish Government has a golden opportunity to try to do something about it.

The Competition and Markets Authority has launched an investigation into the personal and small business banking markets in the UK. Consider some of the facts that have spurred the CMA and the Financial Conduct Authority into action: the largest four banks divide between them 77% of the personal current account market in the UK, provide over 85% of business current accounts and 90% of business loans.

If this is a worrying concentration of market power, then the situation in Scotland is truly shocking. As I point out in Smaller, Greener Banking, my recent paper for Friends of the Earth Scotland (FoE), north of the border just two banks, RBS and Bank of Scotland (owned by Lloyds) share 70% of the personal and small business markets between them. 

 This fact was noted by the Scottish Government in its banking strategy document last year, which expressed concern that a lack of sufficient competition in the Scottish banking market was having a negative effect on consumer choice and availability of credit, but also on the ability of Scottish businesses, particularly SMEs, to invest and grow.

The CMA investigation gives the Scottish Government a platform to press these concerns and demand that something is done about it. In my banking paper FoE and I call for the enforced break-up of these dominant giants to form smaller banks, encourage competition and local accountability. Just making banks smaller is not a panacea for the evils of the current banking market, but smaller institutions are easier to manage, easier to regulate and simpler and cheaper to deal with in a crisis. 

Up until now successive UK governments have lacked the political courage to break up the big banks. It was the European Commission which forced Lloyds to hive off TSB and RBS to (eventually) recreate Williams & Glyns, one of the regional English brands it extinguished a generation ago. 

Unless Scotland votes for independence the Scottish Government currently does not have the power to force a break-up, and we can’t be sure even in that case that it would do so. Its banking strategy document, while eloquently making the argument for more diversity and competition, stops short of proposing a remedy and the independence White Paper, Scotland’s Future, is completely silent on the issue. 

But if it is serious about improving the banking market in Scotland now is the time to make its argument powerfully and publicly. This is not exactly a new situation, the UK and Scottish market concentrations were identified by Sir Don Cruickshank in his report 15 years ago, but nothing effective was done about it.