SIZE ISN’T EVERYTHING

Robert Peston’s blog gives some interesting insight into the ongoing discussions between Lloyds Banking Group and Co-Op about the sale of the so-called “Verde” branches and accounts.

It’s well worth a read (after you’ve finished here of course) but in short he suggests that Co-Op would become such a big banking institution that the regulatory requirements present a fundamental challenge to the business as a whole – one they may well walk away from.

So would it be a bad thing if that deal fell through? Aside from giving the big chiefs at Lloyds a bit of a headache, I’m not sure it would.

One of the arguments in favour is that adding Verde to the existing Co-Op would create a genuine potential rival to the big high street banks – and that can only be good for competition. But at the risk of being simplistic, it’s not actually creating anything at all. To be sure Co-Op would have far greater exposure through the branches and become a more powerful institution, and the economies of scale could perhaps allow more attractive pricing, which would be good for consumers.

But by the same token Co-Op is already a presence in the banking sector and, if mortgages are anything to go by, already price very competitively – certainly they’ve had many more best buy products of late than, say, Lloyds or Barclays. It’s hard to imagine they would sacrifice extra profit to cut rates further. The Verde acquisition would give them a boost to the top tier, of financial institutions, but would not necessarily add anything new to the market as a whole.

If not Co-Op, who? The two most likely alternatives (according to RP anyway) are a standalone floatation, or a sale to NBNK (who have reportedly put in a revised bid). In either case a truly new institution would be created and therefore increase competition in the market to the tune of one.

Yes it would be of a smaller scale, but really the relevance of that is largely down to the consumer. Again let’s look at mortgages, where small can very often be beautiful. It’s something I’ve already talked about at some length – and there are some cracking deals around from the likes of Melton Mowbray, National Counties and Market Harborough at the moment.

The size of an institution rarely denotes the quality of its offering in any walk of life (let’s reflect on the words “British Airways” and “luggage” for a moment), but it’s down to us as consumers to decide whether we let a big name outweigh other considerations. Personally speaking I was pleased that Northern Rock remained an independent institution through Virgin Money, rather than it being incorporated into an existing bank or building society. In a similar vein I don’t think we should be sorry if Verde became a new bank in its own right.

Competition is best served, I suspect, by more players rather than bigger ones – but only if we treat them equally.

For Pestonism in full go to BBC News

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