By Martin Waller, Andrew Clark writing in The Times
The Independent Commission On Banking’ Report In 2011
The most sweeping changes to British banking for a generation will land on financiers’ desks this morning when a government-appointed task force delivers proposals for structural reforms that will be vigorously fought by the City.
In a plan to defuse any future financial crisis that is set to be broadly adopted by the Government, Sir John Vickers’ Independent Commission on Banking will recommend a ring fence around the high-street arms of banks to protect customers’ money from “casino” operations in investment banking.
Months of intense lobbying by the financial industry have failed to change the five-strong panel’s view that taxpayers need protection from the prospect of a reckless City trading floor bringing down a leading retail bank.
Under public and political pressure to act, George Osborne will address the House of Commons this afternoon, having already described the ICB’s report as “very good”. But a new phase of the battle will begin as banks strive to delay implementation of the reforms for as long as possible.
One source at a large bank said: “You can come up with a proposal which causes minimal additional disruption and minimal additional cost, or one which makes it difficult to continue trading as people are at the moment.
“We need to know how the Treasury is going to take [the report] and implement it. You can trash all of us or you can trash none of us.”
The commission believes its plans will protect taxpayers from vast bills to safeguard customers’ savings in the event of a future Lehman Brothers-style implosion at an investment bank. Critics say that this misses the point, arguing that the failures of Northern Rock, RBS and HBOS were brought about by high street banking flaws, rather than trading floors.
Banks insist that the proposals, which include higher capital reserves, will harm their international competitiveness and damage the services they offer at the counter.
Several analysts’ notes have set the potential reduction in profits at Barclays at £1 billion or more because of the need to retain extra reserves. Morgan Stanley has suggested profits for 2014 could be reduced by £1.4 billion. Royal Bank ofScotland, which is 83 per cent-owned by the taxpayer, could be hit, again losing more the £1 billion, the City believes. If the retail bank is separated, RBS would no longer be able to raise funds cheaply as a retail bank, relying on the implicit guarantee of government support, to fund its investment banking activities.
Lloyds, too, could be at risk if the Vickers report calls for any increase in the 632 branches the bank has been ordered to sell by regulators. However, indications at the weekend were that the ICB had reined back from imposing tougher conditions on the bank.
The findings, to be delivered to the banks at 5am this morning before its formal release two hours later, are likely to put forward measures that will make it easier for customers to switch their accounts to other banks.
John Pain, a partner at KPMG and formerly at the Financial Services Authority, said: “The principles are but the first step. It’s that detail that will shape the economics.” Legislation will have to determine whether retail divisions will be allowed to lend to corporates or small businesses, or whether this would be done by the investment banking side.
Andrew Gray,UKbanking leader at PwC, said: “We need clarity as to what the Government wants to put in the legislation. We need to know how those customers which use services from both sides of the ring-fence will be treated.” These might include smaller businesses, he said.
John Longworth, director-general of the British Chambers of Commerce, urged the Government to act slowly, arguing that swift change could harmBritain’s already faltering economy. “We need more solid evidence that ring-fencing will avoid future crippling bailouts, and that the costs will not exceed the benefits,” he said, adding that the price of reforms could be “enormous”.
Some analysts have mooted a figure as high as £10 billion, although the ICB’s report will say that the cost is much lower.
The Treasury wants to delay implementation into the next parliament. But both the Liberal Democrats and Labour want quick action.