A UK government-sponsored report made a stinging attack on British banks yesterday, saying customers and small businesses were paying £3-£5 billion sterling (€4.8bn-€8bn) too much for banking services and tougher regulation was needed.
Government-appointed expert Mr Don Cruickshank, publishing his long-awaited review of UK banking, also erected a potential roadblock to bank mega-mergers by saying takeovers should be referred to the Competition Commission to stop further concentration in current accounts and small business lending.
The government moved swiftly to act on one of his recommendations, launching a monopoly probe into banks' small business lending, where Cruickshank had highlighted a high degree of market concentration.
The chancellor of the exchequer, Mr Gordon Brown, who commissioned the review, will respond in his budget speech today.
Mr Cruickshank attacked the banks for using their market power to make super-normal profits and excessive returns to shareholders. He said high bank charges amounted to between £40 and £400 for most households in the country and more for small businesses.
The British Bankers Association (BBA) hit back at the report, saying many of its conclusions were questionable, tenuous and unsubstantiated.
"The widely-quoted excess profit figure of £3-£5 billion is based on very tenuous analysis," BBA director-general Mr Tim Sweeney said in a statement. "Spin-doctor numbers should not be the basis for government policy," he said.
But Mr Cruickshank acknowledged that competition was already hotting up in retail banking as a result of the Internet and new entrants.
The former UK telecoms regulator said the monopoly probe into banking for small and medium-sized businesses should consider breaking up banks with big market shares.
"There is no prospect of significant [new] entry and the market share of the big four [banks] is rising," he said.
Britain's big four banks - Lloyds TSB, HSBC, Barclays and NatWest, now owned by Royal Bank of Scotland - control more than 80 per cent of this market.
Mr Cruickshank said the result of this market structure is high profits and high prices.
Mr Cruickshank said the investigation should include the threat of the break-up of the big four's businesses in that area.
He said viable businesses could be divested as stand-alone entities. Cruickshank also said the Competition Commission should look at Royal Bank of Scotland's small business arm following its takeover of NatWest, which had given it a big market share in the north-west of England.
Analysts' views on the report were mixed, with some saying it was tougher than expected and others seeing it as mild.
Banking stocks bounced after initial losses and the FTSE banking index closed up 0.5 per cent, compared with the overall market's 1.0 per cent rise.
Mr Cruickshank criticised the level of charges for Automatic Teller Machines (ATMs) in the UK and called for a new regulator, Paycom, to supervise this system.
