New banks will struggle to compete, says RBS chief

The Royal Bank of Scotland's chief executive, Stephen Hester, dismissed the chances of a new generation of smaller banks that are poised to enter the market against big banks like his.

Mr Hester was speaking as Andrew Tyrie, the Conservative chairman of the Treasury Select Committee, announced an investigation into the level of competition in retail banking.

Asked whether he would be keen to be involved in Lord Levine's much-hyped attempt to set up a new bank were he not at RBS, Mr Hester said: "We shouldn't kid ourselves. Banking is a mature and capital intensive business. There are very few industries like that where the number of competitors is increasing. It is decreasing.

"Consolidation is driven by customer needs and I can't think of a single country in the world where the number of banks is going up."

He added: "A risk of debate around banking services has been a wistful recall of what I call the 'Hovis advertisement' view of banking – where simple services of loans, mortgages, current accounts are delivered to people and businesses by an expert, almost fatherly, branch manager. Yet our customers' needs have evolved significantly. They expect to be able to do their banking online, to purchase goods and services across borders whenever they want, and to have access to a wide variety of savings vehicles. Our customers want to keep up with these changes, not look backwards."

Royal Bank of Scotland has been forced to sell more than 300 branches by European Union regulators as a result of the state aid it received to save it from going under. They are likely to be bought by Spain's Banco Santander, which already has a big UK business and is expected to partially float it off.

However, Lloyds Banking Group will have to sell more than 600 branches while the state-owned Northern Rock is also set to come on to the market. These will be targeted by all new banks, such as Lord Levine's venture and Virgin Money.

Mr Hester, speaking at the British Bankers' Association's annual conference before Mr Tyrie's announcement, insisted that banking was already "highly competitive" even though it is dominated by big groups. He also said he believed the Government would profit from its 84 per cent stake in the bank he runs. "In the era of tight public finances, this repayment of support, at a profit, is much needed and I believe is achievable," he said.