Big banks told to ring-fence retail side to protect taxpayer

The Independent Commission on Banking stopped short of calling for banks’ retail and investment arms to be split, but insisted its reforms should help ensure no bank is “too big to fail”.

Shares in Barclays and Royal Bank of Scotland lifted 2.8 per cent and 2.3 per cent respectively, despite the banks being told they must hold more capital as a buffer against future crises.

Lloyds Banking Group was dealt the heaviest blow by being told it must sell more branches to shrink its influence on the high street.

The commission – which is only advisory – aims to make banks less risky and better able to absorb losses, as well as improve competition.

ICB chairman Sir John Vickers and his colleagues are trying to prevent a repeat of the banking crisis of 2008-9 which left the taxpayer holding big losses.

The State was left owning 41 per cent of Lloyds, 83 per cent of Royal Bank of Scotland, the whole of Northern Rock plus the mortgage book of Bradford & Bingley.

Tough new capital rules will force lenders to hold at least 10 per cent of core tier one capital – three per cent more than recommended by European regulators. This could put it at odds with the European Union, warned legal experts.

Ring-fencing retail arms, which hold customer deposits, would see them operate as separate subsidiaries. This would make it easier and cheaper to sort out a bank in a crisis, allowing its cash machines and branches to remain open while investment banking arms were run down.

ICB also said creditors, not taxpayers, should be liable for future losses.

“A safe and sound banking system is a cornerstone of a competitive economy,” said Sir John.

He denied the report was hobbled by Government ownership of bank stakes, or that it has been soft on the banks.

“In no sense do I think we’ve been hobbled by our remit,” he said. “I absolutely reject any notion that we’ve bottled it. (This is) a package of measure that could make a world of difference to UK retail banking.

“In no sense at all are these half-measures.”

Lloyds is already selling 600 branches after European regulators forced it to shrink as a condition of taking state aid.

The ICB did not say how many more branches must go, but said the lender should “substantially enhance” its divestiture programme.

Even after selling 600 branches, Lloyds will still be the biggest player on the high street, with a quarter of current accounts, 19 per cent of mortgages and 18 per cent of savings accounts.

Lloyds said it was surprised at the “prescriptive nature” of the recommendation and warned it could slow down its branch sales.

“This option appears to be based on limited evidence and may paradoxically potentially delay a new competitor coming into the UK market,” said new chief executive António Horta-Osório.

However, the Government-commissioned report said forcing the bank to unwind its merger with HBOS “does not appear to be a sensible course to pursue”. Shares in Lloyds edged up 0.2p to 62.36p.

Lloyds’ emergency takeover of HBOS in 2008 added 1,100 branches to give Lloyds a network of around 3,000.

The ICB said there was “cause for regret” that the Government changed competition law to allow the merger, but added “the facts in 2011 need to be taken as they are”.

The ICB said the costs of reversing the merger would be high, and the benefits were “not clear cut”. “It would not re-create HBOS’s position earlier in the decade as a strong challenger,” it added.

Banks must also make switching current accounts easier, said the report. It suggested forcing them to ensure a switch is completed in a set time, to improve the speed and effectiveness of the process.

Adrian Coles, director general of the Building Societies Association, said it was important mutuals could operate on a level playing field where banks are not propped up with taxpayer support.

“The BSA has been calling for reform of the banking sector in the UK to prevent dominant shareholder owned banks benefiting from implicit Government guarantees that enable them to distort the markets in which they operate,” he said. “We are pleased to see that this is so strongly picked up in the ICB interim report.”

Rules ‘would prevent Amro disaster’

THE man heading the Government-commissioned reform of the UK banking system said tough new rules on capital could have prevented Royal Bank of Scotland’s disastrous acquisition of Dutch bank ABN Amro in 2007.

The takeover, at the height of the credit boom, resulted in RBS coming close to collapse and left the Government holding 83 per cent of the lender. The Independent Commission on Banking proposes forcing banks to hold at least 10 per cent of their core tier one capital.

ICB chair Sir John Vickers said: “With capital requirements of the kind laid out, could RBS have purchased ABN Amro and financed it? I very much doubt it.”