PRIVATE AND CONFIDENTIAL
COMMERCIAL-IN-CONFIDENCE
This risk would be materially increased if the MMC recommendation was that the merger should not be approved and the Secretary of State were to agree. Midland would then possibly face a period of great difficulty and uncertainty which would not necessarily be relieved by an alternative bid from HSBC Holdings: other potential bidders might well be deterred by the decision. Even a strong alternative bid would be followed by a further period of uncertainty while the procedures of the OFT and MMC were followed. There could be a risk of a collapse of staff morale and possibly also depositor confidence. The Bank considers this to be
a potential and serious danger.
Conclusion
28 It is certainly arguable that in all deregulated banking markets such as are increasingly found in the UK and, indeed, in the European Community more generally, retail banking is over-supplied. Competition is intense: returns on equity have recently been low and risk/reward relationships have deteriorated in most countries over the past decade. Costs can be reduced, but there is a limit on the extent to and speed with which any single institution can pare its overheads. Rationalisation by this route could also take some time. Significant consolidation among major retail banks has already occurred in several European countries, in North America and in Japan. It is unsurprising therefore that there should be similar pressures in the UK. The issue is whether in the absence of consolidation the alternative process of attrition might weaken the UK banking sector as a whole because it is not seen to have a firm enough base. This is what has already happened in the USA.
29
Whilst the merger of Lloyds and Midland may reduce the number of major banks from 4 to 3, many of the sub markets in which they participate are already highly competitive and certainly contestable. The main area where the market is not contestable
is the market for loans to small businesses and smaller corporates ie those whose sole source of funding is the banks, and who do not have access to the capital markets. Such companies will see the number of institutions from whom they would naturally seek
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COMMERCIAL-IN-CONFIDENCE
8