Will Bank Rescues Kill Off Free Banking?

Another day, another banking crisis. Will the fall in the number of British banks lead to worse current accounts?

This article was first sent to Fools as part of our The Good, The Bad and The Ugly email campaign.

For several years, I've argued that the UK was locked in the grip of an extraordinary triple boom of overspending, debt and rising house prices. However, the events of recent months have been worse than even I predicted...

The banking bonfire

This year, the bonfire of the banks has been brutal, with Northern Rock and Bradford & Bingley nationalised, Abbey and B&B's savings arm being bought by Santander, HBOS being pushed into the arms of Lloyds TSB, and the share prices of every major bank (except global giant HSBC) taking a savage beating.

Will this harm current accounts?

Of course, a fall in the number of independent banks competing for business in the UK is sure to lead to a reduction in competition. What's more, with the banks needing billions of pounds to rebuild their battered balance sheets, British borrowers should brace themselves for higher interest rates and fees. In my view, credit will continue to become scarcer and more expensive, perhaps for years to come.

What's more, with weaker banks being taken over, and a likely backlash against foreign-owned banks, I think customers will seek out `safe' havens by moving current accounts and saving accounts to the biggest and strongest brands. Hence, I expect Barclays, HSBC, a united Lloyds TSB/HBOS and Royal Bank of Scotland/NatWest to benefit from this `flight to quality'.

A year ago, there were nine major banks listed on the London Stock Exchange. Soon, there will be only the four giants listed above, plus Asia-focused bank Standard Chartered. Alas, I also believe that the public will lose out from this market upheaval. As banking once again becomes concentrated in the hands of these Big Four, competition will suffer as a result. Hence, I can see these outcomes:

1. Some current accounts will be withdrawn, leading to fewer products from which to choose. (The October edition of Moneyfacts magazine lists 100 different current accounts from 35 different providers. Talk about being spoilt for choice!)

2. Interest rates and fees for overdrafts -- both approved and unapproved -- will rise.

3. The interest rates paid on credit balances (and savings accounts linked to current accounts) will fall.

4. In an effort to shore up their profits, some banks will reintroduce monthly fees for current-account banking -- a practice that died out in the Nineties.

So, my advice would be to look around for a current account which suits your everyday banking needs, but which also pays (and charges) competitive rates of interest and no or low fees. Then again, I don't like packaged bank accounts which offer a bundle of benefits and add-ons in return for a monthly fee.

You can search, and apply, for a table-topping current account via the Fool.

Two more top tips

1. If you worry about slipping into the red now and again, then be sure to arrange a suitable overdraft limit. The fee for this will be a lot less than the sky-high cost of slipping overdrawn without permission.

2. As with savings accounts, the credit balance in your current account is protected by the Financial Services Compensation Scheme (FSCS). This covers 100% of the first £50,000 (£100,000 for joint accounts).

> Compare current accounts at Fool.co.uk