Will giant new banks emerge in the UK?

We live in unusual times, says guest blogger Carol Wheatcroft of TowerGroup commenting on the rapid consolidation that has kicked off in the UK mortgage lending market as a result of the subprime crisis.

Normally when Sibos takes place, the financial press is filled with the ins and outs of the day’s happenings, but external events seem to be taking center stage, given the huge and dramatic changes occurring in the world of global finance.

Today is the turn of HBOS in the United Kingdom. The share price of UK’s largest mortgage lender has come under considerable strain in recent days as a result of its perceived short-term liquidity problems, and the bank is now reported to be in advanced talks for a merger with LloydsTSB.

Assuming this will come to pass, and on top of other mergers and takeovers — Nationwide acquiring the Derbyshire and Cheshire Building Societies, Santander buying Alliance and Leicester — the number of players in the UK retail financial market is shrinking before our eyes.

In more normal circumstances, the UK Competition Commission would block a takeover such as that of HBOS because the deal will give LloydsTSB more than a 25% share of the UK mortgage lending market and a quarter of the market of bank and savings accounts.

But these are not normal times, and the need to instill trust, confidence, and stability in the financial system is paramount. Given the UK government’s choices as it watches HBOS struggle through another Northern Rock scenario in the form of nationalisation or finding safe harbor, regardless of the competition issues, the latter seems by far the better choice. At least no more taxpayers’ money will be involved.

So assuming LloydsTSB acquires HBOS — an event that can probably be expected to happen overnight — where does the outcome take us? The socio-political ramifications of this deal on top of all the other deals will mean that the considerable impact on jobs following massive branch closures and consolidation of call centers that might be expected may not occur, or at least not at their normal speed. Arrangements will have to be worked out if a significant increase in unemployment or strike action by disgruntled employees is to be avoided.

With such a consolidated industry, too much power will move to the banks at the expense of consumers. The UK market suddenly more than ever needs competition from foreign banks offering the consumer greater choice. This need offers a glimmer of hope for the UK financial technology industry now that it suddenly has far fewer customers.

Direct banks entering the UK market could create new opportunities. The UK consumer will be looking for new homes for deposits now that there is greater consumer awareness of the need to keep deposits below £35,000, the deposit insurance limit, in any one bank. Despite the consolidated banking market, the UK has a solid depositor base that foreign banks could seek to help shore up their own balance sheets.

Welcome them with open arms!