Britain’s banks are to be offered at least three options for structural reform by the Independent Commission on Banking, which is expected to publish its interim report on April 11.
Although its findings will not pass straight into law, they will form the backbone of the coalition’s next phase of banking reforms.
The commission will put forward options to break up banks — but will also set out other possible reforms. The group, chaired by Sir John Vickers, is known to have conducted extensive research on how bank balance sheets could be overhauled to cut the risk of future bailouts.
Lenders may be offered the chance to operate with higher capital levels as an alternative to a break-up. The commission is also looking into the merits of innovative new debt structures that may help to protect savers’ cash. Other potential reforms focus on the mechanics of winding down a bank in danger of collapse.
Britain’s big banks are living in fear of the commission’s findings — which will be finalised in a full report in September.
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A separate report from the Commons Treasury committee published yesterday demanded more competition in banking and called for measures to make it easier for customers to switch accounts.
Structural reforms are the bigger threat, however. Barclays and HSBC have both warned against introducing any legislation that would put British banks at a competitive disadvantage.
Barclays, led by Bob Diamond, is known to have held tentative discussions with American regulators about the implications of moving its headquarters to New York.
Stephen Hester, chief executive of Royal Bank of Scotland, has previously warned that the government would struggle to make a profit from the sale of its 83% shareholding in the bank if it forces through a radical break-up.
The banks say splitting investment and retail banking would push up the cost of loans. They also claim it would not make the system safer as the banks that failed in the credit crisis were mostly either stand-alone retail banks such as Northern Rock, or dedicated investment banks like Lehman Brothers.
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Three broad types of break- up are being examined by the commission, according to industry sources. One would see banks forced to push all their international businesses into separate subsidiaries. The second would see a partial split between retail and investment banking.
Many big banks are lobbying for a third option called operational subsidiarisation, where key infrastructure such as a bank’s payments system would be ring-fenced. It would ensure that customers could pay their bills and access their cash for about three months after a bank went bust.
— Britain’s big banks are to launch a campaign to support small firms this week. The Better Business Finance initiative will provide mentors and other hands-on advice.