Yorkshire’s warning over the creation of a new major bank

The Government-appointed Independent Commission on Banking is currently mulling ways of reforming the banking system and making it more competitive.

Its interim report called for mortgage giant Lloyds Banking Group to sell “substantially” more than the 632 branches it is being forced to offload as a condition of accepting state aid.

Prospective bidders for the branches include NBNK Investments, Yorkshire Bank owner National Australia Bank and Virgin Money. On their own the branches, codenamed Project Verde, would be the seventh-biggest high street bank.

The Government has also started the sale of Northern Rock and its 70 branches, nationalised at the height of the financial crisis.

The logic behind merging the two is centred on deposit-rich Northern Rock helping fill Verde’s funding gap.

Yorkshire, the UK’s second-biggest building society, welcomed the ICB’s call for a bigger sale of Lloyds branches.

“This is a move in the right direction, although equally we note that this would have the effect only of taking LBG’s market position back to that which it held in the pre-HBOS acquisition era,” said the mutual in its submission.

However, Lloyds’ response to the ICB argued such a ruling would be “disproportionate and discriminatory”.

Andy Caton, Yorkshire’s corporate development director, warned combining Northern Rock and the Lloyds branches could be damaging to the mutual sector.

“It would imply more concentration in the market,” said Mr Caton. “You would have a bigger entity and also probably for an organisation of that scale... it might exclude that being in the mutual sector.

“Just by combining the two that might reduce the pool of possible people interested in it. It could be self-defeating.”

Instead YBS said the market needs “a larger field of smaller, well-managed players rather than a concentration of too-big-to-fail players”.

Yorkshire and its rival Coventry Building Society are both considering bidding for Northern Rock. Chancellor George Osborne last month kicked off the sale at his Mansion House speech, when he said a return to the private sector would help rebuild Britain’s reputation and recoup some of the £1.4bn spent on rescuing the Rock.

“YBS wishes to renew its call for the remutualisation of Northern Rock which would go a long way toward enhancing financial stability and increasing diversity and choice to consumers,” said the mutual.

YBS also threw its weight behind the introduction of a ring-fence to split retail banking from riskier investment banking.

The concept of splitting banks’ operations but keeping them under a single holding company would allow a bank to be safely wound down in a crisis, the ICB believes, reducing the likelihood of recourse to the taxpayer.

“It is crucial that in a universal bank retail deposits should not be used to cross-subsidise a wholesale sibling such that the retail entity risks being exposed to failure if the wholesale business fails,” said YBS.

However, the mutual added it is vital this reform does not hinder building societies’ vital capital raising activities.

“We believe that all building societies’ activities should be included in a retail ring fence, given that their activities, including the treasury operations, are linked directly to providing retail financial services.”

The mutual added its treasury division exists to manage liquidity and raise wholesale funding and capital. “It is not operated as a profit centre in its own right,” it said.

Britain’s biggest lenders are resisting the ring-fence proposals.

In its response to the ICB, Barclays said the benefit of a retail ring-fence is “marginal at best” and would impose hefty costs on banks and customers. HSBC said the costs of the plan would be substantial and would hurt Britain’s economic growth.

Part-nationalised lenders Lloyds and Royal Bank of Scotland both said the ring-fencing approach could backfire.

Lloyds said the ring-fencing would improve financial stability but could hinder the banks’ ability to boost economic growth, while RBS said the ICB’s proposals could carry “significant economic costs”. The ICB reports back in September.

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