Market Overview

UK Banks Told to Reform or Face Breakup

The head of a British consumer watchdog group said on Thursday that the United Kingdom's biggest banks must reform themselves or face potential breakups.

John Fingleton, the head of the Office of Fair Trading (OFT), said in a speech that the four major banks that dominate the British banking sector must do more to make the banking industry more open to smaller competitors.

Mr. Fingleton said that it was particularly important that British banks make it easier for customers to move their accounts to other banks. He also said that the banks must become more transparent by making it the clearer to customers how they are charged for using the banks' services.

The British banking industry is currently dominated by Barclays (NYSE: BCS), HSBC Holdings (NYSE: HBC), Lloyds Banking Group (NYSE: LYG) and Royal Bank of Scotland (NYSE: RBS). For more than a decade, the British banking sector has been criticized over its lack of competition and the situation has become even worse since the financial crisis that hit British banks a few years ago. During that time, a number of troubled banks were taken over by bigger banks with government approval because the priority at the time was to keep the banks from collapsing.

The banks have once again come under scrutiny over their business practices since the crisis passed. Mr. Fingleton said that if he didn't see progress from the banks, he could turn the matter over to the Competition Commission, which has the power to break up the banks if it finds that their business practices are focused on preventing competition within the banking sector.

This is just the latest bad news for British banks to come out over the last two days. Yesterday, Moody's Investors Service announced that it was placing more than 100 European banks under review for possible downgrades. The credit rating agency also said that it was putting more than a dozen banks with significant global capital markets operations under review for possible downgrades. Those banks included Barclays (BCS), HSBC Holdings (HBC) and Royal Bank of Scotland (RBS).

The banks' earnings are already under pressure because of disappointing performances from their investment banking units. If the United Kingdom's four biggest banks are forced to make it easier for their customers to move their accounts to smaller banks, the banks' earnings could be further reduced. Forcing them to be more open about how they charge customers could also make the big banks' customers more likely to look for alternative banks, much like many American consumers did last year when they became fed up with the business practices of banks like Bank of America (NYSE: BAC).


ACTION ITEMS:

Bullish:
Traders who believe that in the long run more competition will be good for the United Kingdom's biggest banks might want to consider the following trade:
  • Buy shares in the big UK banks. If the UK's biggest banks are forced to compete, it could lead to innovation and cost cutting that increases their earnings in the long run.
Bearish:
Traders who believe that the big banks' earnings will suffer if smaller competitors begin taking away their customers may consider an alternative position:
  • Shorting the stocks of these four banks could prove profitable if the banks are forced to change their ways and make it easier for customers to move their accounts to other banks.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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