A key element of UK competition policy is that any merger which leads to the creation of a firm with more than 25% of market share will automatically get referred to the competition commission. The competition commission will then evaluate whether the merger is in the public interest.
However, the due to exceptional circumstances, the government made an exception for the merger of Lloyds TSB and HBOS. Thus Lloyds TSB were able to gain monopoly power without being blocked by the competition Commission.
Generally, a merger of over 25% of market share is unlikely to be approved unless there are exceptional reasons. For example, very significant economies of scale or an industry which requires substantial risky investment. Industries such as aerospace manufacture may have economies of scale so large a merger may be justified. However, gains from economies of scale have to be weighed against the loss of competition, less choice, and likelyhood of higher prices for consumers.
In the Banking sector, there are few economies of scale that can be gained from the merger of Lloyds TSB and HBOS. However, the new firm has a significant degree of monopoly power (over 30% of high street banking). Combined with Santander (who own Bradford & Bingley, Alliance & Leicester and Abbey), the big two have over 50% of the UK mortgage market. It means competition in the banking sector has been significantly reduced and consumers face limited choice.
Last week’s recent rise in fixed rates was an omnious warning to future bank pricing.
The problem is that the banking sector is not very contestable. New entry into the market is difficult – especially in the current climate.
Of course, the justification for the takeover of HBOS by Lloyds TSB was that it was a more attractive option to the government who wanted to avoid having to nationalise it. Yet, it poses awkward issues for the future of British Banking.
As the governor of the Bank of England warned – It is undesirable to have banks which are too big to fail. But, that is exactly what has happened from recent developments in the banking industry. There are strong reasons to consider breaking up Lloyds TSB / HBOS.