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Tuesday, 10 July, 2001, 12:00 GMT 13:00 UK
Q&A: The Lloyds/Abbey merger decision

The decision by the Department of Trade and Industry (DTI) to block the proposed merger between Lloyds TSB and Abbey National has enormous repercussions for the British banking sector. Whether it benefits consumers or not, it will certainly complicate - or even scupper - a series of proposed mergers in the financial industry. BBC News Online looks at the likely consequences.

How will this affect me?

If you are an existing Lloyds TSB customer you may be disappointed by the merger failure.

Abbey National tends to offer much better rates than Lloyds TSB, so there may have been a chance of improved interest rates on current and savings accounts, along with better mortgage deals.

Conversely, if you are an existing Abbey National customer, you might be relieved, as you could have lost the favourable rates Abbey offered.

Customers who are not with either bank should, in theory, be pleased that the deal has failed.

Consumer groups were concerned that it could have created an unfair monopoly in the current account market.

In general, consumers do better out of a competitive market: this has been proved through the recent influx of new internet banks, such as Smile, Intelligent Finance and Egg, which have offered consistently better rates than most High Street banks.

Consumer groups are concerned in general at the dominance of the big four high street banks - Lloyds TSB, Barclays, HSBC and Royal Bank of Scotland, owner of NatWest.

These banks have 68% of the current account market. A recent Treasury-backed report talked about the "hassle factor" in switching accounts and recommended the introduction of a 50 fine if banks failed to transfer account details within five days to encourage more people to switch.

Why did the government block the deal?

The immediate reason was worry over concentrated control of current accounts, but the government also has longer-term strategic concerns.

The DTI feels that the UK banking market requires at least five major participants in order to function freely.

Abbey National is currently not among the five biggest British banks, and is certainly much smaller than HSBC, Lloyds TSB, Barclays and Royal Bank of Scotland.

But the government felt it was necessary to preserve its independence, so it could remain a sniper from the sidelines.

There was also a fear that allowing Lloyds TSB free rein at Abbey National would have spurred on other potential mergers, such as an often-rumoured bid by Barclays for Bank of Scotland.

Since Bank of Scotland is already in the process of attempting to acquire Halifax, this could have prompted dramatic consolidation in the financial sector at alarming speed.

What's next for Lloyds TSB?

Lloyds claimed not to be downhearted by the merger veto, insisting it would continue to pursue a growth strategy.

But if it still hopes for acquisitions, it will probably have to look overseas.

And the key market here is going to be Europe, where a number of countries are currently opening their financial services markets to overseas competition.

The three other big UK banks will also have to look overseas for merger opportunities.

But Lloyds is in a worse position than its rivals to make it in the outside world: unlike HSBC, Barclays and Royal Bank of Scotland, it has no experience in the international market.

Instead, concentration on the UK high street has been the secret of its success over the last few years.

What's next for Abbey National?

Minutes after the merger was blocked, Abbey National put out a statement saying it would pursue an "aggressive" growth strategy.

There have been persistent rumours that Abbey itself may launch a bid for a rival bank, possibly even targeting Bank of Scotland.

The firm has, however, vehemently denied any such intention.

It is also unlikely to be interested in overseas expansion, for which it lacks experience.

Instead, it is likely to focus on building its share of the British retail banking sector, an area in which it has been trying hard - including innovations such as in-branch coffee shops.

It is also conceivable that Abbey could seek a link-up with one of the smaller banking groups, in order to form a fifth force on a scale to compete equally with the big four.

One obvious partner would be National Australia Bank, which owns the Clydesdale and Yorkshire Bank networks.

Is this an end to UK bank mergers?

It certainly is for now, at least as far as the big four are concerned.

Since Lloyds is the smallest of the big four UK banks, the prospects of any of the other three being allowed to increase their British market share are dim, to say the least.

What's less clear is the likely fall-out on pending deals among the second-tier banks.

The biggest current merger proposal is between Halifax and Bank of Scotland.

Nothing yet suggests that this deal might be impeded.

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See also:

10 Jul 01 | Business
Lloyds TSB/Abbey tie-up blocked
09 Jul 01 | Business
Banks 'must speed transfers'
06 Mar 01 | Business
Big banks 'operate monopoly'
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