There has for many years been considerable concern that there may be insufficient competition within the banking and related sectors (as well as concern about weak regulation of these sectors:- see my separate note on this subject). Significant Competition Commission (CC) inquiries into the sector include that into the proposed merger between Lloyds Bank and Abbey National (for which the CC refused permission) and market investigations into SME banking, current account banking in Northern Ireland, and the sale of Payment Protection Insurance (for both of which the CC imposed 'remedies' aimed at improving the functioning of those markets). Many other investigations have been carried out by the OFT and the European Commission. (Box 3 within the Issues paper published by the Independent Commission on Banking listed 24 investigations from 2000 - see below for further information about the Banking Commission.) But it was well recognised that these investigations were merely examining discrete elements of an industry which appeared to have widespread competition problems, whether evidenced by its high profitability, its high salaries and bonuses, or its apparent disdain for its customers, itself evidenced by mis-selling and/or poor service quality. None of these things are by themselves conclusive evidence of weak competition, but you would expect them to be competed away over time as companies fight to gain market share by cutting prices or treating their customers better - but this was simply not happening.
The obvious response was to begin a wide ranging market investigation, but experts agreed that the industry was just too big and too complex for such an exercise to be able to reach appeal-proof conclusions within the statutory time limit of two years. And then there came the 2007- global financial crisis. As well as increasing the depth of concern about the extent of competition within the industry, the extent of competition was further reduced by the need to wave through the emergency acquisition of HBOS by Lloyds TSB. Wise heads recognised that this decision would look less clever once the emergency had passed - as it did, including to Lloyds TSB shareholders - but there genuinely seemed no alternative at the time.
Andrew Haldane, the Bank of England's Executive Director for Financial Stability, joined others when arguing, in March 2010, that the UK's banks should be broken up into smaller and more resilient units. The incoming Coalition Government elected in may 2010, then lost not time in establishing the Independent Commission on Banking in June 2010. The Commission was asked to take a wide-ranging look at the structure of the UK banking sector, aimed at (a) making banks more resilient and/or more able to fail without undue distress to the wider economy, and (b) making the sector more competitive so that it serves its customers better. In particular, could steps be taken to remove the inducement to excessive risk-taking arising from the perception that some institutions are 'too big to fail' and therefore guaranteed by the public purse? The Commission was not to look at questions such as the adequacy of capital reserves, liquidity and macro-prudential regulation - i.e. measures intended to improve the stability and resilience of the financial system as a whole - e.g. resilience to cyclical developments. The Commission was headed by Sir John Vickers, previously a first-class Head of the Office of Fair Trading and now Warden of All Souls College, Oxford.
The Commission published its 'Issues Paper and Call for Evidence' in September 2010. This is a detailed but readable (and must-read) document for anyone seriously interested in this policy area, in which the following are amongst many interesting observations:
The Commission has been asked to report by September 2011.