Anger as banking blueprint overlooks carve-up

The Government-appointed Independent Commission on Banking is currently drawing up a blueprint for the UK banking system to prevent a repeat of the financial crisis when billions of pounds were spent on bailing out banks.

In its interim report, the ICB called for banks to ring-fence their retail arms from other operations to avoid taxpayers bearing the brunt of future collapses.

But the ICB, chaired by Sir John Vickers, stopped short of calling for a full carve-up of banks’ retail and investment arms. Instead, the ICB has said banks’ retail and investment arms should be held under a single parent company.

The Treasury Select Committee yesterday criticised the “thin treatment” given to discussing full separation.

“Full structural separation of retail and investment banking was dispatched in just one page of the interim report,” said Andrew Tyrie, chair of the cross-party committee. “This is not a convincing demonstration that full consideration has been given to this option.”

The group of MPs said the ICB needs to analyse in detail how both a ring-fence and full separation would hit competition and impact on the cost of credit to business.

They also called for the ICB to give more clarity around ring-fencing and warned against discussing the reforms in private.

“A retail ring fence would entail a huge change to the structure of the banking sector in the UK,” said Mr Tyrie. “It is crucially important that the debate on that reform does not take place behind closed doors. It is equally important that all the information and arguments needed in order to assess the reforms are published by the committee.

“To implement the ring-fence without having done so would be a leap in the dark. Our long-term prosperity depends on getting this right.”

Britain was forced to nationalise Northern Rock and Bradford & Bingley when the credit crunch sucked liquidity from the banking system, triggering the first run on a UK bank since the 19th Century. The Government was also left holding 41 per cent of Lloyds Banking Group and 83 per cent of Royal Bank of Scotland.

The reforms aim to make the system more stable and competitive. The ICB believe ring-fencing would allow vital retail operations to be kept running in a crisis, allowing other operations to be sold or wound down.

It believes combining this with higher capital standards – forcing banks to hold back more of their profits on their balance sheets – would reduce risk to taxpayers.

In its interim report, the ICB said it opted for a “combination of more moderate measures” partly because ring-fencing would be a much cheaper option.

The heads of Britain’s top banks have expressed concerns that the ICB’s reforms may be counter-productive, and could constrain their lending.

“The banks warned us the ICB’s structural reform options could potentially be costly. They claimed that a retail ring-fence would contribute little to increased financial stability and may inadvertently increase moral hazard and risk-taking,” said Mr Tyrie.

“These are important objections and we believe Sir John needs to come out and demonstrate that his proposals would not have the negative or unintended consequences that his critics assert.”

MPs also called for more scrutiny of bankers’ bonuses.

“The failure to address the issue of corporate governance was a serious omission in the ICB’s interim report,” said Mr Tyrie.

The ICB’s final conclusions will be advisory, and it will then be up to the Government to decide whether or not to act on them.

The ICB declined to comment.

Commission’s look at reforms

The Independent Commission on Banking was created by the Government in June 2010 to consider reforms to the UK banking sector to promote stability and competition.

It was asked to come up with both structural and non-structural reforms. It publishes final recommendations on September 12.

It is chaired by Sir John Vickers, former chief economist at the Bank of England.

Other members are former Ofgas director general Clare Spottiswoode, Syngenta chairman Martin Taylor, former JPMorgan Investment Bank co-chief executive Bill Winters and Financial Times commentator Marton Wolf.