Chancellor stumbles over bank break-up

Has a new world of stable, competitive banking been created by recent announcements about Northern Rock, RBS and Lloyds?

I'm afraid the answer is no.

If he had wanted, Chancellor Alistair Darling could have used taxpayer ownership of these banks to do something genuinely radical. But what we see is only the minimum required for Brussels to sanction the huge subsidies paid to these banks by the British taxpayer.

Look more closely at what has been agreed.

Northern Rock: the smallest of the three and the only fully nationalised bank. This has been split into a 'good bank' and a 'bad bank'. The bad bank will take the toxic assets leaving the good bank unencumbered to lend. This sounds good, but local building societies who have been more cautious in the past, still find themselves with bad loans after house prices dropped. They may also find themselves squeezed by the reborn Northern Rock and wonder why they should be penalised for having had sensible lending policies in the past.

RBS: the gay abandon of Sir Fred Goodwin's unbridled acquisitions and failure to focus on the fundamentals of banking created the biggest bank in the world out of a modest regional bank. He also created the largest-ever UK losses and the costliest bailout in the world. It is now 70pc owned by the taxpayer but this will rise to 84pc with a promised cash injection. RBS branches in England and NatWest branches in Scotland will be sold.

RBS - and its forerunner brands such as Williams & Glyn's - have never been strong in East Anglia. RBS probably has fewer branches in the region than NatWest has in Norwich alone. Whether or not the disposal will regenerate lending to small and medium enterprises (SMEs) will depend crucially on who buys these operations.

Lloyds: includes some of the biggest brands in UK banking including Lloyds, TSB, Halifax and Bank of Scotland. The latter two were acquired at the height of the crisis promoted by an unholy alliance of the chancellor, Bank of England and FSA. It even required special legislation through parliament to avoid antitrust scrutiny overriding the view of the Office of Fair Trading. What must be divested in return for mistakes that required the British taxpayer to buy up nearly half of the group? Cheltenham & Gloucester in England and some Scottish branches of the main bank. This still leaves Lloyds with a bigger market share than it had before the ill-fated, steamrollered acquisition of HBOS.

If we add the loss of other names like Bradford & Bingley in the crisis, borrowers and lenders are left with less choice. Last week, the EDP's Adam Aiken wrote about Tesco and Virgin's potential entry into banking. But it will be a long time before they can mount a serious challenge.

A bigger step towards more stable, competitive banking could have been taken, but the Chancellor has stumbled.

Professor Bruce Lyons is deputy director of the ESRC Centre for Competition Policy and professor of economics at the University of East Anglia. www.uea.ac.uk/ccp