This is nuts. UK banks want to charge customers for the privilege of handing over their money and letting banks gamble it in the global derivatives casino.
From the Telegraph:
A groundswell of support for change is understood to be gathering among the authorities. The Treasury’s advisers on the Independent Commission on Banking and the Office of Fair Trading are said to be also backing the proposals, alongside the treasury select committee and financial regulators.
Britain is the only country in Europe to operate a “free-in-credit” model of current account banking. Instead of levying fees on an account, lenders make their money through “stealth charges” on overdrafts and cross-selling of other products. Only India and Australia run equivalent models.
Regulators and officials want to reform the system to boost competition by making it easier to compare rival accounts. They also believe so-called “free banking” encourages mis-selling of financial products, exposes banks to compensation risks and lets customers down.
So the impression that bankers and regulators have seems to be that banks are doing customers a favour by holding onto their money and occasionally losing it all buying junk securities.
Nope. In a free market, banks that tried to charge customers for the privilege would be laughed out of the marketplace. Banks — by their very definition as intermediaries — generate profits from making good investments, not by charging customers for the privilege of holding their money.
Unfortunately this isn’t a free market, and banks can (and probably will) co-ordinate with each other to keep the market uncompetitive. Barriers to entry make it difficult to impossible for new players to enter the market and dislodge the status quo.
As the Office of Fair Trading noted in their must-read 2010 report:
New entrants to the retail banking sector face significant challenges in attracting customers and expanding their market shares, an OFT review has found.
The review of barriers to entry, expansion and exit in retail banking, published today, was launched in May 2010 to identify any obstacles blocking firms from entering the sector or from successfully competing against existing firms, as well as factors preventing inefficient firms from exiting the market and being replaced by more efficient ones.
Two words: banking cartel. Need I say more?
Anyway, I know what I will do with my money if my bank insists on charging me for the privilege of gambling my money: close my account, and find a bank that won’t charge. Even given the current barriers to entry, the opportunity to undercut the bigger players will be too good an opportunity to miss. And I’m sure lots of other people will do the same. Given that some parts of the UK banking industry (especially the Spanish-owned parts, and especially Banco Santander) are already looking shaky, does the UK banking industry really want customers pulling their money en mass?