Banking Commission seeks uneasy compromise

The independent commission's verdict on the banking sector is eminently sensible - but it's unlikely to please either the banks, or their biggest critics...

by James Taylor
Last Updated: 28 Oct 2015
Will our biggest banks feel they've got off relatively lightly after reading today's long-awaited interim proposals from the Independent Commission on Banking? Although the committee thinks they should be forced to ring-fence their retail banking operations, and boost their capital buffers, it stopped short of recommending that they should be broken up into smaller chunks - which could mean that it'll be business as usual for the investment bankers. On the other hand, since it would be fairly self-defeating to regulate the City out of existence, we can't help feeling Sir John Vickers and co have come up with a thoughtful and balanced compromise...

The commission was set up by the Coalition last year, tasked with finding ways to prevent a future banking crisis and promote more competition on the high street. Those who see bankers as the root of all evil were hoping it would conclude that the so-called 'universal banks' should be broken up, so taxpayers won't be lumbered with the bill next time the investment banking spivs bring down the house. But Vickers and co reckon this would be too expensive and destroy the competitiveness of the City. And since these banks employ a lot of people and provide the funds the economy needs to grow, there's surely no point in crippling them altogether.

Instead, the commission has tried to find a third way. It wants the Government to force the banks to ring-fence their retail banking deposits and hold a capital buffer of 10% for this part of the business - more than the 7% currently required by international rules. This, it says, would be nothing like as expensive as the banks claim (more like £5bn than £15bn, it reckons). And the theory is that if a bank gets into bother, like Northern Rock did in 2008, a panic would be far less likely because depositors would know that the ailing bit could be wound down, safe in the knowledge that their hard-earned funds would be secure.  So, in effect, it's a step towards 'living wills'. This is a nice idea, though whether it will work in practice is another question entirely (we're not sure how rational depositors tend to be in those circumstances).

The unhappiest of the big banks is likely to be Lloyds; the commission was fairly scathing about its merger with HBOS, which it reckons has had deleterious effects on competition. Again, it stopped short of the nuclear option, i.e. recommending that the merger be reversed; it thinks this would not be a 'sensible course to pursue' at this stage. But it does think that Lloyds should be forced to sell off even more branches, on top of the 600 it's already been ordered to divest by the EU. One suggestion was these could be bundled up with Northern Rock, to give a new entrant a bigger foothold in the market. This is a useful idea, since retail banking is essentially about scale; it’s hard to see a small new competitor being able to come in and undercut the big boys.

The market’s verdict has been pretty clear: most of the big banks have seen their share price jump this morning, presumably on the grounds that this could have been an awful lot worse. And although the banks have been grumbling about the extra cost and regulatory burden of these proposals, we’re suspect they won’t be too unhappy with the outcome – at least so far. The reaction to these initial proposals may yet affect the tenor and content of the final report in August…

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