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19 December 2011

Banking sector shake-up must improve competition

Reference number: PR/2011/74

FSB News Release
PR 2011 74

Banking sector shake-up must improve competition

The Federation of Small Businesses (FSB) is urging the Government not to water down the proposals in the Independent Commission on Bankings (ICB) report and is calling for an increase in competition in the banking sector to be at the heart of the Government''s response next week.

The FSB has long said that increasing competition in the small business credit market is paramount for a secure banking industry. The FSB believes that the ICBs recommendations have the potential to do this.

Research by the FSB shows that nine in 10 (89%) of small firms believed that the banking system needs reform, and 70 per cent said that opening up competition would be key to this. With five high street banks holding 85 per cent of the small business banking market, competition will drive down the cost of credit for small firms and increase the stability of the sector as a whole.

The UK small business finance market needs additional lenders to inject new energy and product innovation and to provide a buffer if one, or more of the major banks becomes distressed. This is critical since the ongoing crisis in Europe could have major ramifications for the UK''s banking industry.

New competitive banking ventures could be helped by regulators becoming more proactive so they help new entrants into the market, as well as assuring that new banks are safe early on.

The Government must accept that ringfencing would help to make the structure of the banks safer, while at the same time protect day-to-day operations which are important for small firms. The FSB also welcomes the recommendations from the ICB for an easier switching programme and living wills for systematically important banks.

John Walker, National Chairman, Federation of Small Businesses, said:

"This is a vital decision by the Chancellor and we hope he understands that competition and stability are two sides of the same coin. More banks, especially specialist banks, could help to improve relationships with small firms, and boost product innovation. Most importantly, it could reduce the systemic risk of the entire banking industry.

"We understand that pressures are being placed on the banking industry due to the crisis in the eurozone, but we also know that small businesses need choice in finance, a working and trusted relationship and innovative financial products to help them grow.

"While we also realise that many of the proposals will have to have a wider consultation, it is vital that the Government looks to do this as soon as possible so that changes can be put in place before the end of this Parliament."