Britain set up the Independent Commission on Banking (ICB) last year to examine a shake-up of the sector in the aftermath of the credit crisis, which saw top lenders such as Royal Bank of Scotland and Lloyds need taxpayer bailouts.
The ICB has always said it would examine splitting up companies’ retail banking arms from their investment banking divisions since its launch last year.
On Saturday, ICB head John Vickers said that while the ICB was unlikely to support “narrow” bank models over bigger and more diversified groups, it would nevertheless examine ring-fencing retail bank units from market trading operations.
Vickers also said banks might have to strengthen their balance sheets above and beyond recommendations made by the Basel committee of bank supervisors, in order to protect retail customers if their investment banking arms failed.
Analysts said these proposals might cause banks to raise further capital to strengthen their balance sheets.
“He has sent a clear warning shot across the bows of the banks. The ability of the banks to raise further capital for their retail arms may prove to be very difficult,” said BGC Partners’ David Buik.
DIFFERENT SUBSIDIARIES UNDER PARENT OWNERSHIP?
Britain’s “Big Four” banks — RBS, Lloyds, HSBC and Barclays — have all resisted calls for a radical carving up of their businesses.
Lloyds is keen to hold on to the HBOS retail bank it bought in a government-backed deal during the height of the 2008 credit crisis, while RBS, HSBC and Barclays are also determined to protect their lucrative investment banking businesses.
Vickers said “forms of separation” within large banks was an option worth considering, such as ring-fencing banks’ retail deposits from their investment banking activities and forming separate subsidiaries for these different units.
Under such a subsidiarisation model, banks have to allocate capital to units or country operations, as Spanish bank Santander does with its British arm. The units are legally ring-fenced but remain under the parent’s ownership.
Such a move could make companies’ investment banking operations more costly to run, analysts said.
“The cost of funding for universal banks’ investment banking arms may well rise substantially,” said Canaccord Genuity analyst Cormac Leech.
“But there appears to be a clear intent to reduce the implicit taxpayer guarantee that investment banks currently enjoy,” he added.
The ICB will produce an interim report on its findings in April, before making its final conclusions in September.
Despite calls from politicians to cull the investment banking industry, many industry members and analysts have said it is unlikely that British banks will ultimately be forced into a full break-up.
Most universal banks proved stronger than many “narrow lenders” with less diversified business models during the crisis, and a full break-up could also prompt banks to go overseas, where they would be under less regulatory pressure.
BGC Partners’ Buik said any final recommendation for a full split-up of Britain’s top banks could have damaging repercussions for the overall economy, given fears that it could harm London’s position at the helm of global finance.
“A full split would be an unmitigated disaster,” said Buik.