Oligopoly of Banks

Topics: Bank, Lloyds Banking Group, Oligopoly Pages: 9 (1582 words) Published: April 30, 2014
BRITISH BANKS: CRACKING THE OLIGOPOLY

Student: Aruni Dileepa Wijeweera - 16639300
Student: Elie Gharib - 16443365
Student: Ying Sheng - 17903022

Lecturer: Dr. Neil Perry
Economics 200425
Due Date: 18th November 2013

United Kingdom (UK) banking industry started in 1694 with the establishment of Bank of England, with the main purpose of funding the war against France. Throughout the years and with the expansion of the banking industry, many private banks invaded the market and started their operations. During the twentieth century, large banks started to acquire or merge with small banks thus leading to a more concentrated market. (British Banking History Society) UK banking industry is known by the “Big Four Banks”: Barclays, Hong Kong and Shanghai Banking Corporation (HSBC), Lloyds Banking Group and The Royal Bank of Scotland Group (RBS). These banks have controlled the market in UK by seizing 77% of the market share that lead to an economic situation called oligopoly (Treanor, 2012). A situation, where there are few firms producing all or most of the market supply of a particular good or service, is the standard definition for the market structure of an oligopoly. Oligopoly seems to be an economic structure that is easy but unfortunately it is much more complicated and multi layered market with several characteristics (Nellis & Parker, 2006). Following the Global Financial Crisis that hit the world in 2008, many governments had to step in and bailout several banks in order to save their market from a severe crash down. UK government intervened twice in order to restore market confidence and stabilise the British banking system. (Peston, 2008) After the takeover of HBOS in 2008, the European Union (EU) ruled Lloyds in 2009 to sell 631 branches in order to increase competition and customer choice in the banking industry through creating a new bank (Trotman, 2013). This was the result of the bailouts Lloyds and other banks received from their government. TSB Bank PLC was created and started its operations on the 9th of September hoping to crack the oligopoly. This essay will examine the characteristic of oligopolistic markets and discuss whether TSB Bank PLC is capable of driving the competition from oligopolistic market towards a more competitive market. In the banking industry, existing banks can retain on the long run abnormal profits due to the high barriers of entry that prevents new banks from entering the market to capture the surplus profits. There are various barriers of entry forced by existing banks in order to make it hard for new entrants to compete such as, accessibility of complicated and expensive technology, size and economies of scale and strategic behavior that consists of advertising, merging and takeovers (Taylor & Frost, 2006). According to the article, there are two main challenges faced by new banks which want to enter the banking industry including the newly formed TSB Bank. The first challenge is related to scale of operation which is highly important in banking sector in order to attract customers all over the country. The Big four banks have established a strategy by locating branches suited next to each other in order to gain consumer shares, unfortunately TSB have a small amount of branches that ensures its national presence only and this will have an effect in attracting consumers (Cracking the Oligopoly, 2013). TSB should extend its operations all over the country in order to compete with large rivals and gain market share. An expert estimated that TSB needs at least 1,000 branches in order to compete, however having this huge number is not an easy task completed within fortnight. Hence, one of the things TSB can do is merging with smaller banks that are facing same issues or the acquisition of the 316 branches that the EU forced RBS to sell. Unfortunately, another challenge faced by TSB is the accessibility of efficient and modern computer systems in...
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