OFT warns on concentration of bank power

LONDON (Reuters) - The head of the Office of Fair Trading said on Tuesday that customers would suffer if the government failed to prevent the recent mergers of troubled banks from leading to monopolistic behaviour.

John Fingleton, chief executive of the Office of Fair Trading, said regulators must avoid a "two-tier system" developing between newly-created banking giants and new entrants.

Writing in the Financial Times, Fingleton said restricting new entrants would "deliver only monopoly profit to the incumbents at customers' expense."

Fingleton did not directly refer to Lloyds TSB's takeover of Britain's largest mortgage lender HBOS at the height of the banking crisis last September, which the government sanctioned without a competition inquiry.

But he said consumers would be the losers if the government failed to balance the need to save banks with efforts to promote competition.

"We need to ensure that today's solutions do not inadvertently become tomorrow's problems," he said.

"History tells us that restricting competition can look attractive to policy makers faced with distressed businesses in a recession."

The relaxation of competition rules in the United States in the 1930s depression and in Japan in the 1990s had prolonged the recession in both countries, he said.

"When the current recession is over, the UK will face even stronger competition from growing economies, and restrictions on competition now would represent a serious long-term drag on the economy," he said.

(Reporting by Tim Castle; Editing by Kazunori Takada)