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to banking for small businesses; that it was difficult to judge whether divestment in lieu of reference was a realistic option. CP reserved their position on the Article 21(3) argument. The Treasury considered that there was no case for seeking an Article 21 exit for HSBC; that the Lloyds bid was an "archetypal" case for MMC reference on competition grounds and because of the need to take into account the possible ramifications of rationalisation. The Department of Employment also considered that the Lloyds bid should be referred and that there was no case for an exit. The Bank of England argued that there were no grounds for an Article 21 exit for HSBC; they agreed with Lloyds that there was overcapacity in the banking market (and not just in the UK), but shared my Office's concern about competition in the small business sector. They agreed that the market was a "local" one, but could offer no useful comment on the parameters appropriate for any divestment undertaking. The FCO presented the views already expressed to me by Alastair Goodlad.
CONCLUSION AND RECOMMENDATION
28
These have been complicated matters to consider, but the key issues are, in my view, quite clear. As some Panel members remarked, the Lloyds' bid appears to be an "archetypal" case for MMC reference. Although Lloyds have proposed divestments, there are too many uncertainties over the nature and scale of the likely detriments in the market for small business lending, and whether an undertaking for the divestment of branches would address them. Only a thorough and public examination of the issues by the MMC could satisfactorily resolve the question. In consequence I do not recommend negotiation of undertakings.
29 On HSBC the UK has already advised the EC that this case raises no issues of competition and I have identified no other public interest issue which would in my view justify an MMC reference; and I see no reason on "evenhandedness" grounds to adopt such a marked change of established policy in this particular instance.
30 Accordingly, I recommend that the possible acquisition by Lloyds of Midland should be referred to the MMC for further investigation, and that you do not seek an exit in respect of the HSBC bid under Article 21(3) ECMR.
Enda Barrie
GORDON BORRIE
CONFIDENTIAL AND MARKET SENSITIVE
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