COMMERCIAL-IN-CONFIDENCE
37. Lloyds consider that there would be benefits from the merger and that it would be in the public interest. They suggest that in order to provide effective competition to Natwest and Barclays there needs to be a competitor of roughly equal size. They consider this a more important determinant of competition than the number of competitors. They take the view that recent developments in the market- eg new technology, competition from building societies and overseas banks, increased bad debts at home and abroad, increased solvency requirements to meet the concerns of regulators following the removal of other regulatory constraints (eg Government credit controls) and the increasing internationalisation of the banking market- necessitate major changes in the structure of the UK banking industry if it is to remain profitable and efficient. In particular, they claim, the number of branches needs to be substantially reduced; the savings thus generated (mostly from staff costs) would in part be used to improve services and reduce charges to customers.
38. Lloyds have announced plans for staff cuts following the merger of up to 20,000 in branches and at Head Office over the next few years. They suggest that although all clearing banks, including Midland, have been closing branches, the highly-regulated nature of the banking industry reduces the normal competitive pressures (because a bank will not be allowed to fail) and leads to a loss of efficiency. A merger with Lloyds would ensure that the necessary changes were carried out more quickly, and in an "orderly" fashion. Since HSBC have no UK branch network, the benefits of this rationalisation would not arise if their bid succeeds; some branches may be closed, but piecemeal and over a longer period. The UK would remain "overbanked".
Lloyds' proposals on divestment
39. In their submission to the Office on 8 May, Lloyds stated:
"We gave been approached by interested parties in respect of the sale of branches. It would be premature for as to discuss such arrangements but at a future date we would be willing to explore such possibilities if it could be shown that there are undue local concentrations".
40. At a meeting on 12 May, Lloyds acknowledged (a) that there might be a competition issue arising in the Factoring market (which might be resolved by disposal of a business) and (b) that lending to small businesses might present competition concerns. Lloyds tabled an analysis of branch overlaps at post code level and offered to prepare a note on possible branch level divestment and (c) a reconsideration was required of their position in merchant acquiring.
41. On 14 May Lloyds offered an undertaking to divest Griffin Factors (the Midland factoring subsidiary) and provided further details of their position on merchant acquiring. This
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COMMERCIAL-IN-CONFIDENCE