The evolution of competition in the UK deposit-taking sector, 1989-2013

Improving competition was one of the key objectives of the UK banking and building society deregulation that came into effect in the 1980s. We use data for banks and building societies for the period 1989-2013 and a number of measures of competition, to examine whether competition did improve over the longer term, and whether the financial crisis changed this trend. We find that following a period of heightened competition in the 1990s between banks and building societies in UK retail markets, consolidation in the sector in the late 1990s saw the emergence of large banking groups and a reduction in competition in the 2000s, ahead of the financial crisis. We also find no evidence that competition subsequently improved following the crisis. Lastly, we find that market power, as measured by the Lerner index, is likely to be considerably less for building societies than for other firms.