Redraft banking rules to let competition thrive

Sherlock Holmes once solved a mystery by concentrating on "the dog that didn't bark". In the story Silver Blaze, the detective's point was that sometimes it is more useful to look at what isn't happening than what is.

In financial markets, there is now a dog that isn't barking: Very few new banks are appearing.

A year and a half after many of the world's major banks had to be bailed out with government support, customers don't like their banks, don't trust them, and don't think much of their fees. You would imagine that if the market was working properly, entrepreneurs would come forward to blow the industry wide open.

It isn't happening. The financial services industry still isn't open enough to new competitors. If governments and regulators want to fix just one thing about the markets, it should be that. There are plenty of reasons to think this is a good time to be establishing a bank.

First, the banks are widely disliked. They went broke, got bailed out by the government, then went straight back to paying themselves huge bonuses as if nothing had happened.

Second, the recklessness of many of the world's leading financial institutions before the credit crunch has left many people wondering if banks are really safe.

Third, their services and fees aren't great. They never were that good, but banks are increasingly repairing balance sheets by boosting charges for ordinary consumers.

Unpopular companies, lacking the trust of their customers, offering poor value — it should be a perfect opportunity for someone new to come into the industry and rip up the rulebook. In a free market, when customers are unhappy with an industry, you expect to see new alternatives.

Trendsetters

In the airline industry, Ryanair Holdings Plc blew away the old carriers with its cheap, if not entirely friendly, approach to flying. In the auto industry, new companies from Japan and Korea shoved aside the old manufacturers. And new retail and restaurant chains are launched all the time.

So why not in banking?

There may be some inertia. It's a hassle to move a current account in particular. But the real reason must be that there are too many barriers to entry.

After the credit crunch, we heard a lot about improving the regulation of financial services. In reality, there are very few economic problems that can't be more easily solved with a healthy blast of competition.

What governments and regulators should be doing is making it easier for new people to break into the industry. Rules should be redrafted to make sure they don't favour the established players over newer competitors. If the regulators need to focus on just one task, they should be promoting more competition — because that's the only thing likely to produce a better industry.