Bank and Building Society Mergers Can Spoil Your Savings

By: MoneyFacts

UK bank and building society mergers do not benefit their customers, according to a new study. An analysis of UK bank and building society mergers has found that although these mergers have generated substantial efficiencies for the banks concerned these benefits have not been passed on to customers.

The study by the ESRC Centre for Competition Policy at the University of East Anglia found that while most merging institutions have benefited from mergers, interest rates for the bulk of banking customers remain unchanged. Indeed, savers who hold notice saving accounts with merging banks and building societies have suffered a decline in interest rates up to six years after a merger takes place.

Dr John Ashton and Dr Khac Pham examined 61 UK bank mergers occurring between 1988 and 2004. For each of these mergers, efficiency changes were recorded for individual banks and interest rate movements were recorded for savings accounts, mortgages and personal loans.

Data from Moneyfacts.co.uk was used to make these detailed interest rate comparisons. They found that merging banks improve their levels of efficiency up to six years after a merger, indicating that merging banks and building societies can provide banking services to their customers at a lower cost.

By contrast, in most cases the levels of interest paid to, or demanded from, customers shows no significant difference to the interest rates provided by banks and building societies, which have not merged. Of greater concern, customers holding notice savings accounts with merging banks have suffered a significant decline in interest rates relative to customers of banks and building societies which have not merged.

Commenting on the findings Dr Ashton said: “Retail banking customers gain little from bank mergers and in some cases can lose out from mergers. Consequently, the consumer perspective must be given more consideration when assessing the merits of future potential banks mergers.”

The findings indicate that while banks have obviously made beneficial merger decisions, these benefits are not shared with their savings, personal loan and mortgage customers. In some cases, such as notice saving accounts, mergers have actually led to worse interest rates for customers.

Notes

1. For further details, please contact John Ashton on 01603 591618, 07747 075993 or email j.ashton@uea.ac.uk. Alternatively, contact the University of East Anglia Press Office on 01603 593007.

2. The study, entitled Efficiency and Price Effects of Horizontal Bank Mergers by Dr John Ashton (Lecturer in Regulation from the Norwich Business School and the ESRC Centre for Competition Policy at the University of East Anglia) and Dr Khac Pham (Research Associate from the ESRC Centre for Competition Policy), provides an empirical assessment of the efficiency and interest rate changes occurring during 61 UK retail bank mergers. Key findings of the work include the general efficiency enhancing influence of influence of UK bank mergers and the limited effect of merger on retail interest rates. Furthermore, different banking products appear to be influenced differently by mergers. It is proposed that future assessments of bank competition and mergers require an accommodation of different types of bank customer.

3. The full text of the research study is available on the CCP website (http://www.ccp.uea.ac.uk/publicfiles/workingpapers/CCP07-9.pdf).

4. The Centre for Competition Policy (CCP) at the University of East Anglia is the leading UK centre for research into the economics and law of Competition Policy. Funded by the Economic and Social Research Council, its members undertake high quality, independent, academic research into competition and regulation and its impact on companies and society. CCP’s output is in the public domain.

5. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It provides independent, high quality, relevant research to business, the public sector and Government. The ESRC invests more than £123million every year in social science and at any time is supporting some 2,000 researchers in academic institutions and research policy institutes. It also funds postgraduate training within the social sciences to nurture the researchers of tomorrow. More at http://www.esrcsocietytoday.ac.uk

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