1 Banking Structure and Competition By C.A.E. Goodhart Financial Markets Group, London School of Economics (disclaimers) Competition and Stability Competition and Stability in banking are in Conflict, not Complements. (a)Lesson drawn after Purpose of laws, e.g. Glass-Steagall, was to compartmentalise and encourage cartelisation, to restrict competition in setting interest rates. (b)Financial crises follow liberalisation, UK Fringe Crisis (1973/74) after Competition and Credit Control (1971) was typical.

2 (c)Northern Rock, Anglo Irish, etc.; financial intermediaries trying to grow faster lead to lower standards. (d)Countries which allowed least competition, especially from foreign banks, in domestic bank retail business (Australia, Canada, China, India, Japan) tended to be least affected by crisis. Implication. The more competition is to be promoted, the more comprehensive the constraints and intervention should be.

3 Structure is becoming Standardised Most developed countries coalescing around a banking structure dominated by three or four huge universal domestic banks. Examples: USCiti, JPM, BoA, WF UK Germany France Sweden China Japan Spain Switzerland Australia Canada, … etc., etc. Often plus a penumbra of smaller (mutual, public, specialised) intermediaries (S&Ls, Cajas, Savings banks, Building Societies). The latter are either tightly controlled, or often dangerous.

4 Why an oligopoly? Any further concentration politically unacceptable (except in crises). Meanwhile Barriers to entry of de novo, start up banks. Problems with foreign banks. Economies of scale in market role (observation of order flow), international expertise and advice, and IT. Constrained by managerial grasp.

5 Barriers to entry (1)e-banking not, so far at least, very successful, especially on the lending side. Need for ‘soft’ personal information. (2)hence need still for branch net-works and complex IT system. Large minimum initial size may be required (Metro?); Tesco banking? (3)are regulatory requirements for entry too onerous and time-consuming?

6 Foreign Banks Hence most competition comes from entry of foreign banks. But this is procyclical, enter in good times, withdraw in bad, as recently in UK. Does more stability require more host country control? Should we require all sizeable banking business in UK to be subsidiaries, not branches?

7 Conclusions Arguable that pre-2007 too much competition in UK banking, given light-touch regulation. For example, Northern Rock, Icelandic banks, free banking for depositors, should never have happened in an efficient banking system. The more that you want to press for competition, the more that you must constrain bad banking of a traditional kind, e.g. too fast expansion, reduction in spreads, economising on capital, poor liquidity, etc.