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preads is limited by the willingness of foreign banks to enter .e market and supply funds to such firms. As in the 1980s the entry of such firms would gradually reduce the spreads on the business until firms leave the market as a result of heavy losses.
20 A third type of sector is non-contestable, where the level of switching costs for customers and/or sunk costs of entry for competitors are high. Such market conditions may result from sunk costs such as relationships between banks and customers, which restrict the ability of a borrower to transfer from one bank to another. If a branch network is needed to obtain such customer information, it imposes an additional sunk cost barrier to competition. These conditions typify the market for lending to small businesses and smaller corporates, which is seen as the main cause for concern in the present context. In such a market, a decline in competition between the clearing banks, as a result of a merger, may have adverse effects on the availability and price of banking services. Such a decline in competition is by no means a foregone conclusion, however, given that it is as likely to encourage the remaining players to distinguish their products to a greater extent as it is to encourage them to collude.
The Three Possible Outcomes
Lloyds and Midland merge
21 If Lloyds and Midland were to merge, there would be in essence two global banks and one large domestic bank with a capacity to become a global bank should the shareholders/directors wish to pursue that strategy.
It would have approximately (25%)
of the domestic market and be marginally larger than its other main competitors. Lloyds maintain that there would be significant cost savings through economics of scale and that thereby shareholders, customers and staff would benefit.
22
By some international comparison UK banking is not as efficient as some countries because of the higher cost base; cost income ratio, currently (67%) for the main UK banks, is a measure which Lloyds are keen to lower significantly in the
the
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