Watchdog criticism sees bank shares fall

The government watchdog Don Cruickshank has published his report on the banking sector, criticising the banks for making ?7.9bn in excess charges and calling for an end to uncompetitive mergers.

The long-awaited report on the banking sector was expected to conclude that the banks were overcharging customers, yet shares in most of the banks still fell on publication of the news.

Small businesses and private investors might get a better deal if the government decides to act on the findings, but the banks themselves and their big investors in the City believe that the industry is competitive enough.

The arguments from both sides are persuasive. Small businesses face swingeing bank charges; high interest rates and have to pay over the odds for the privilege of a bank account. Banks pay little or no interest on balances held in current accounts for retail customers, and fall well behind the best rates on deposit accounts offered in the market.

Banks have managed to damage their public image further as a result of the unseemly row over ATM charges. The impression they give is that they will take any opportunity to make money out of customers - the last straw being the charge to withdraw their own cash on which the bank is making a healthy daily rate of interest which it fails to pass on.

Small businesses may be wooed by the promise that the bank will waive charges during the initial setting up period. Yet once they are through the first year or two, they can pay up to 60p to make a single transaction.

The banks themselves are under pressure. however. European rivals are eyeing them up as possible takeover targets. Some, like NatWest, have already succumbed to predators in their own country. Their market share of deposit accounts and mortgage lending is quickly being eroded by new internet banks with low overheads and no branches to service.

Although the watchdog's aim was to ensure customers get better service and better value from their banks, further falls in bank share prices are likely to trigger another round of takeovers and mergers. In the end the market may be dominated by just a few high street players and a rash of cyber banks.