Pandemic seals dominance of UK’s largest banks


The primary Metro Financial institution department opened 10 years in the past with the purpose of constructing UK banking extra just like the US. A decade on, the coronavirus pandemic has highlighted the gulf that also stays between the 2.

Metro could have succeeded in introducing an American-style emphasis on customer support. However traders — and regulators — had additionally hoped to duplicate the aggressive lending market that helped the US financial system get well when the largest banks had been reluctant to supply loans after the 2008 monetary disaster.

As an alternative, specialists concern the most recent financial downturn will additional entrench the dominance of Britain’s largest banks — Barclays, HSBC, NatWest and Lloyds.

“The 2008 disaster spurred on policymakers to prioritise competitors,” stated Paul Pester, a former TSB and Virgin Cash chief govt. “There’s a giant danger the 2020 disaster takes all of the momentum out of that agenda.”

The large 4 banks had supplied greater than 80 per cent of the government-backed loans designed to assist small and medium-sized companies via the pandemic, as of the tip of June. In distinction, the 4 largest banks within the US accounted for simply 12 per cent of lending of their government-backed scheme in the identical interval.

Though the US market has turn into extra concentrated in recent times, its 4 largest banks nonetheless maintain simply 35 per cent of buyer deposits. Within the UK, the highest 4 maintain nicely over 50 per cent of deposits, and have a very giant share of money in low-interest present accounts, which regulators have stated supplies a “vital funding value benefit”.

The pattern has fearful the Open Banking Implementation Entity, a physique that was set as much as ship competition-boosting measures after a 2016 investigation by the Competitors and Markets Authority.

Imran Gulamhuseinwala, OBIE Trustee, advised the Monetary Occasions that authorities programmes had “saved the wolf from the door for big numbers of companies”, however stated “the broader agenda of injecting much-needed competitors and selection into SME lending may inadvertently be set again.”

“We are able to’t afford to let that agenda slip,” he warned.

Difficulties confronted by “challenger banks” earlier than the pandemic have been exacerbated.

Smaller lenders trying to shut the hole with larger rivals should now take care of a poisonous mixture of falling revenue margins, rising regulatory prices and a surge in mortgage defaults, whereas non-banks that can’t take buyer deposits have battled with rising funding prices.

Document-low rates of interest are particularly painful for smaller companies that lack economies of scale. Nationwide, for instance, deserted plans to enter the UK enterprise banking market after the Financial institution of England’s emergency charge cuts made its plan unviable.

Newer fintech lenders akin to Monzo, Tide and Starling have had their valuations slashed or struggled to satisfy demand from new clients.

On the similar time, HSBC — Europe’s largest financial institution by property — has picked up 1000’s of recent enterprise accounts at a sooner charge than regular, as clients fled smaller lenders that would not present the government-backed loans, in response to one senior govt. 

HSBC’s scale and low funding prices have additionally allowed it to proceed an aggressive push to take market share in mortgages, whereas smaller specialists had been compelled to cease all lending and give attention to backlogs of current clients requesting help.

Mortgages are historically extra aggressive than different areas of the UK market, however the huge 4’s 43 per cent market share remains to be considerably increased than in nations the place insurance coverage corporations and different non-bank lenders are extra energetic.

Bar chart of Customer deposits at June 30 (£bn) showing Customer deposits at the UK's four biggest banks dwarf their closest challengers

Along with Nationwide Constructing Society and Santander, six mortgage suppliers accounted for nearly 70 per cent of UK lending in 2018.

Privately, senior bankers have acknowledged they’re benefiting from their smaller rivals’ woes. “There are some undercapitalised lenders that depend on wholesale funding . . . [and] a few of the challenger banks it’s important to ask questions on,” stated a board member at one of many huge 4 banks. “All that is excellent news for us.”

Though the OBIE has raised considerations about competitors, many within the trade are sceptical they’ll obtain assist. Mr Pester stated that, in concept, there have been many comparatively easy methods to assist strengthen competitors, akin to making it simpler for purchasers to buy round for private loans with out damaging their credit score information, however he warned {that a} lack of political will might maintain again reform.

“Our shopper in creating TSB was the UK authorities, as a result of they needed to fulfill an EU ruling [after bailing out Lloyds]. Who’s going to be waving that huge stick as we come out of this disaster?”

Additionally, as the large UK banks place themselves to help the financial restoration this time, executives concern regulators can be reluctant to punish them.

A number of present chief executives of midsized banks and constructing societies stated they had been fearful in regards to the long-term influence that Covid-19 would have on the UK market, however had been involved about being seen to criticise the federal government throughout a disaster.

John Glen, the financial secretary to the Treasury, advised a current trade occasion that “we have now to ensure we allow competitors and development [in financial services] through the restoration”. The Treasury didn’t reply to a request for touch upon the way it plans to realize this. 

Ravi Anand, managing director of enterprise lender, ThinCats, stated smaller banks and non-banks wanted to get higher at working collectively to push for change.

“The large banks have been attempting to be useful and accomplished what the federal government wished, so there should be strain from our aspect,” he stated.

Mr Anand was nonetheless optimistic about alternatives for development in areas akin to midsized company lending, the place huge banks discover it more durable to automate processes. However he added that the duty can be a lot simpler with regulatory change.

The Prudential Regulation Authority, the arm of the Financial institution of England that supervises giant banks, has acknowledged a few of the points. In a speech late final month, Sarah Breeden, govt director for UK deposit takers supervision, stated the regulator would take into account introducing extra flexibility for non-systemic banks, and will curtail a few of the advantages given to huge lenders which are allowed to make use of their very own inside fashions when calculating risk-weighted property.

Ms Breeden added, nevertheless, that she nonetheless anticipated some lenders to run into hassle within the subsequent few years, and they need to not count on the regulator to intervene. 

“Lots of the new banks authorised since 2014 appear to have underestimated the event required to turn into a profitable, established financial institution . . . Authorising extra new banks inevitably means managing extra banks’ exits.”


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