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In less than a week from now we will have a sharper idea of how Britain’s banks will look – but bankers and politicians are still battling to make sure the future is something they can live with.   On Monday morning, the Independent Commission on Banking, chaired by former Bank of England chief economist Sir John Vickers, will file his 350-plus-page report aimed at ensuring greater competition and financial stability for the UK’s banks. The rest of the City will get it two hours later, when the markets open. Over the last few weeks the markets have become increasingly jittery over what the report may recommend as the economy struggles against anaemic growth, eurozone debt and the US government’s announcement last week that it plans to sue 17 banks – including Royal Bank of Scotland – for mis-selling more than £62bn of mortgage-backed securities during the financial crisis.


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Separate but joined: The government aims to shield taxpayers from losses

Analysts at Citigroup estimate a
draconian break-up of the big banks has wiped between £20bn and £25bn
off the combined market value of Barclays, Lloyds Banking Group and RBS
in recent weeks.  
This has prompted the banks and big
business groups to defend the current system, saying much of the
emergency work to recapitalise lenders has already been done by the Bank
of England and the Financial Services Authority, the City watchdog.
The British Bankers’ Association’s
chief executive Angela Knight has already called for any further reforms
to be delayed because of ‘a high degree of uncertainty and market
turbulence’. Last week the CBI’s director-general John Cridland put it
more starkly, saying more reform would be ‘barking mad’.
This view has incensed Business
Secretary Vince Cable, who has long argued that banks’ retail  and
investment operations – which he calls ‘casino banking’ – should be not
just ringfenced, but split and run as two separate businesses.
 



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The Lib Dem minister has labelled the recent lobbying by UK banks as ‘semi-hysterical’ and ‘disingenuous in the extreme’.
He claims that if the country opts for
ringfencing ‘it will be essential to put the new arrangements in place
as quickly as possible; we cannot wait for another banking crisis to
cause even more damage’.
Analysts say the earliest a tough ringfencing regime could be put in place would be in three years.
However, Chancellor George Osborne and Prime Minister David Cameron seem to have been swayed by the banks.
The pair could back ringfencing, but
suggest giving banks longer to implement a move that will cost them
billions. Analysts warn the higher funding costs will be passed onto
customers, in the form of higher interest rates.
Cameron recently said: ‘I think the key thing we want from banks is lending into the economy so we can support growth and jobs.’
Privately, the Chancellor is thought
to be considering a move to allow banks until 2019 to bring in these
proposals – the same deadline for all banks to adhere to Basel III
global capital requirements.
Ringfencing is the ICB’s answer to the
question of how a country builds banks strong enough to help build
businesses, but not so big that taxpayers have to bail them out when
they fail because their loss would involve too big a disruption to the
economy.
The aim is to insulate taxpayers from
potentially large losses run up by the banks’ riskier investment
operations. Currently, investment banks borrow at lower rates because
the markets know they are backed by their more stable retail operations –
which in turn are backed by the Government, which will not allow people
to lose their life savings, or thousands of firms to go to the wall.
When the ICB’s report drops into the
City’s email inboxes, it will also detail an attempt to introduce
greater competition to a system that has seen a number of lenders fail
over the last three years, including Northern Rock and Bradford &
Bingley, and the enforced merger of Lloyds and HBOS.
Here, the ICB has proposed measures
such as Lloyds selling off hundreds more branches than the 632 the EU is
forcing it to get rid of as a result of having to take state aid. The
aim is to create a new bank with the muscle to become a serious
challenger to High Street stalwarts.
This week it emerged that Lloyds has
been in talks with the ICB over selling another 1.5pc of its Cheltenham
& Gloucester current accounts instead of losing more branches. This
would give the buyer of the Lloyds business a total market share of
around 6.1pc of UK current accounts, making it as big as Nationwide, the
UK’s largest building society.
Year Zero for the banks may be only a few days away – but there is still plenty to fight for.