sts.
FRIVALE AND
COMMERCIAL-IN-CONFIDENCE
It is in this second area that there is a possible logic the Lloyds bid. In essence it is the belief that economies of scale exist in the banking market and that it is possible to run the combined business of Midland and Lloyds through a network that costs barely more than operating one bank's business.
4 If it were accepted that structural overcapacity does in fact exist, whether mergers are the best way to eliminate it (as opposed to long-term attrition based on inability to attract capital or to generate it internally) is another complex matter. It depends partly on its causes. For example, overcapacity on the cost side may be caused by reductions in demand for banking services; increased competition from low-cost institutions such as building societies arising from deregulation; or previous over branching arising from competition over quality of services before deregulation, when banks were a cartel. There may nonetheless not be incentives for an individual clearing bank to reduce its branch network beyond a certain point, because loss of parts of it would have an adverse effect on the rest of the bank, arising from effects on service to customers (there are 'network externalities' similar to those for a telephone company), or on its reputation.
The current market structure
5
The present UK banking market comprises two, large clearers, Barclays and National Westminster (NatWest) which have global presences, and two smaller clearers, Lloyds and Midland, which are mainly but not exclusively domestic banks. Further competition is provided by the Scottish banks, two of whom have significant business outside Scotland, the TSB bank and Abbey National.
6 Since the late 60s, when the last series of bank mergers was considered, competition in all these areas has changed. In particular, the retail banking market has opened up significantly.
Deregulation of the building societies
7
Until about a decade ago, the building societies were restricted in the nature and scale of their operations not only by
a cartel agreement on the rate of interest and type of investment
COMMERCIAL-IN-CONFIDENCE