Editorial: If Osborne won't tame the banks, the market might

For all the vital importance of avoiding a repeat of the economy-threatening financial crisis, it is difficult not to meet the latest back-and-forth over banking regulation with a measure of ennui. It is, of course, necessary to protect taxpayers and bank customers better from the vicissitudes of retail institutions' buccaneering investment cousins. This newspaper supported Sir John Vickers' original suggestion of a "ring fence" dividing banks' operations, and MPs' latest proposal to "electrify" the barrier by giving the regulator powers to break up any backsliders also has much to recommend it. The troubles in the banking industry go beyond the simple question of how to keep the casino separate from the high street, however.

Even were George Osborne to capitulate to the most radical reformers and immediately split up all universal banks, the danger of some financial institutions being "too big to fail" remains largely unchecked, as the fallout from the collapse of investment-only Lehman Brothers amply testifies. Nor would it necessarily do much to address the cultural malaise that led to Libor-rigging, the mis-selling of payment protection insurance, or the laundering of money for Mexican drug cartels (to name but three of the recent scandals to have beset the industry). Most important of all, it would do nothing at all to address the appalling lack of competition that bedevils Britain's banking sector.

As things now stand, just five institutions – Barclays, Lloyds, HSBC, Royal Bank of Scotland and Santander – hold more than four in five of all current accounts and two-thirds of mortgages. Those that defend the status quo use an argument familiar from the dispute over ring fences vs break‑up: a large financial institution – particularly one with money-spinning investment operations – has the economies of scale to subsidise cheaper lending and free retail services. Just as such benefits lose all meaning if traders' "irrational exuberance" periodically threatens to push the bank under, such a stifling concentration of power can also only be of detriment to banks' customers.

Nor is it only individuals who suffer. Businesses, particularly smaller ones, also lose out, thanks to lending policies set nationally, which take no account either of local differences or a particular company's circumstances. Is it any wonder that, despite numerous creative schemes from the Bank of England, efforts to unlock business lending have borne scant fruit?

The good news is that the combination of ongoing customer dissatisfaction and repeated trust-sapping scandals are helping fuel the rise of so-called "challenger" banks, such as the two-year-old Metro Bank or supermarkets' financial services operations. But the barriers to entry remain prohibitively high and progress is slow.

There is another, more disruptive possibility, though, and it comes not from the watchdog (even one with newly sharpened teeth), nor even from the Office of Fair Trading review due in January, but from the market itself. Thanks to the internet, companies such as Zopa and Crowdcube can help those looking for finance to avoid banks altogether, either by matching up borrowers and lenders or by aggregating small amounts from large numbers of investors. So-called "peer-to-peer" financial services, which did not exist until a few years ago, are now growing fast. Indeed, as The Independent reported earlier this week, no less a figure than Andrew Haldane, the Bank of England's director of financial stability, talks of Britain's mono-banking culture being "in retreat".

Tougher regulation is one piece of the puzzle, then. But 2013 might yet be the year that sees the end of traditional banking regardless of the threats of ring fences, "electrified" or otherwise.