SIMON WATKINS: Britain's banking is not working as it should be, but it won't be fixed by forced sell-offs

By SIMON WATKINS, FINANCIAL MAIL ON SUNDAY

Updated: 09:12 EST, 20 January 2014

If Ed Miliband wins the next Election and stands by his plan to force the break-up our biggest banks, then we can kiss goodbye to any hopes of selling the Government stake in Royal Bank of Scotland.

In the wake of the financial crisis and the state aid handed to the banks, the EU came up with a plan similar to Miliband’s. It insisted that in return for the bailouts, Lloyds Banking Group and RBS should be forced to sell a swathe of their branches.

The result has been an unholy mess. The effort by Lloyds to sell 630 branches became caught up in the Co-op Bank debacle. RBS, meanwhile, agreed to sell 316 branches to Santander, but that deal collapsed more than a year ago as the difficulties of untangling the accounts and computer systems of the branches proved vast and the stumbling economic recovery eroded the value of the deal for Santander.

Banks' critic: Labour leader Ed Miliband insists there is a lack of competition

Huge amounts of money, management time and executive and political angst have been expended.

And none of the branches has been sold. RBS and Lloyds now plan to spin off the branches as new banks.

To start such a process again by forcing more branch disposals will waste more time and money, and the sale of the Government stakes in RBS and Lloyds would be pushed back still further.

The uncertainty of major disposals will also undermine the share prices of the banks.

Enough is enough.

Critics of the banks, Miliband included, insist there is a lack of competition, to the detriment of consumers and business borrowers. This may be true, but forced sales are not the solution.

The branch spins-offs by Lloyds and RBS already under way may go some way to improving competition, and the faster bank account switching process set up September has also injected some movement into the market, with the number of customers already up almost 20 per cent, according to figures released last week.

More can be done. More pressure can be brought to bear on banks to ensure they are lending adequately. Lifting some regulatory burdens on small banks – which do not pose a threat to the nation’s financial stability – might also help and some  steps have been taken there, too.

Some transparency on the pricing of current accounts might help as well. How do customers assess the current account market and fuel competition when very few people really know what their account costs them?

Forced sell-offs, as the Governor of the Bank of England has indicated, are a blunt tool that will not necessarily boost competition. And any benefits are likely to be offset by the costs and chaos in the system that will be created.

Our banking system is still not working as it should, but it cannot be fixed with a hammer.