What does the HBOS takeover mean for you?

The HBOS takeover should at least calm any fears about the bank’s safety, for now. But it will also reduce competition on the high street - and that's bad news for savers and borrowers, says John Stepek.

Another one bites the dust.

HBOS has agreed to be bought by Lloyds TSB for £12.2bn. The deal would value each HBOS share at 232p. That's a big improvement on yesterday's closing price of 147.1p, but a far cry from the £11.20 we saw just 18 months ago.

The deal's being described as a private sector solution but this could never have happened without government backing, for reasons we'll go into in a moment.

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So what does the HBOS takeover mean for you?

Why the HBOS takeover is likely to go through

The HBOS takeover isn't a done deal yet, in that its big shareholders could potentially vote against it. And it seems they're not happy bunnies, which is understandable. At 232p, no doubt most of them will be taking a whacking great loss on their holdings. More to the point, Lloyds is paying with its own shares, so it's not as if they can easily cash in on the deal without driving the value of the shares lower. The more than two million retail shareholders will probably be none too chuffed either.

Richard Buxton at Schroders tells The Telegraph this morning that he can't see why, given the extension of the Bank of England's special liquidity scheme (SLS), HBOS couldn't have held out.

But at the same time, I find it hard to see them actually blocking the deal. "Sources" suggest that confidence in HBOS, both on the behalf of customers and lenders, was ebbing away. Maybe in less jittery times the bank could have kept its head down and dealt with any problems it had. But when you've got US investment banks collapsing like dominoes and wholesale money markets threatening to freeze over entirely, you don't have the luxury of time. And if they were to block the deal now that it's been proposed, it's hard to see how they could restore confidence in the bank.

So it seems likely the deal will go through. At the end of the day, shareholder have at least been paid something, which is a lot more than Northern Rock investors can say.

What does this mean for savers and borrowers?

What about savers with HBOS? Well, it's good news in that it should put paid to any fears about the bank's viability, for now. If nothing else, it clearly demonstrates that the Government has no intention of allowing the Financial Services Compensation Scheme (FSCS) to be tested by the collapse of a major high street bank. Of course, it does mean that if you have savings with both Lloyds TSB and HBOS, the FSCS will now cover you for a maximum of just £35,000 between the two, rather than £35,000 each.

As for mortgage holders, again it'll be business as usual, for now. But and this is where we come to the government's involvement in the deal both savers and borrowers can probably expect to get less and pay more in the longer term. That's because this deal dramatically reduces the levels of competition on the British high street.

Estimates vary, but it looks like Lloyds HBOS, or whatever it'll be called (one wag in The Telegraph suggests "Llos") will control 28% of the mortgage market, hold 24% of the UK's savings accounts, and just over a fifth of the credit cards.

Without government backing, the deal simply couldn't have got past the competition authorities. And in the long run, this'll be a problem. As Ray Charcol of the mortgage broker John Charcol pointed out, there'll be less competition in the mortgage market, and it'll be the same with the savings market.

But needs must, when your party is languishing in the polls and you've already seen a run on one bank. Of course, the government has partly helped create this situation. For once, I'm not talking about the years of lax economic governance, though that's been a problem too.

How Northern Rock could consume the British banking system

The trouble lies with Northern Rock. Of all the banks out there, Northern Rock is the safest. The government guarantees the full extent of deposits with the bank, not just £35,000.

Now this might not be an issue if it was the only benefit after all, plenty of people have far less than £35,000 in savings, and other government-backed savings vehicles like National Savings & Investments don't particularly steal business from high street banks. But on top of the security, the Rock still offers very attractive savings rates that easily compete with the competition. So for anyone even mildly concerned about the safety of their cash, it makes a lot of sense to shift their money to the national bank.

So as fear rises, more people shift their money to Northern Rock. Its balance sheet looks ever-more attractive, while other banks see a steady drain on their own saver base. If you ever wanted to nationalise the banking system by the back door, you couldn't think of a much better way than by opening a state-guaranteed savings account, paying commercial rates of interest. The law of unintended consequences strikes again.

Before we go, a quick update on the situation with ETF Securities. We've been speaking to the company but haven't had much more concrete news than that they're working to restore trading in the affected ETCs. However, I understand there will be more news coming out later today, so we'll update here later on.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.