Following business secretary Vince Cable’s latest attack on banks for insufficient lending yesterday, the bank chiefs were debating Vickers’ proposal to ringfence retail banks from wholesale at a committee hearing with MPs.
Flint said that a ringfence could protect depositors: “I think it is required… The primary responsibility of policymakers should be to make sure the supply of credit to the real economy is uninterrupted.”
Lloyds chief António Horta-Osório agreed, saying: “I do think that separation protects customers and is a key part of any resolution plan.” He also attacked investment banks, claiming the cost of their activities “does not fully reflect the risks being taken” due to cross-funding between wholesale and retail business lines.
But this was flatly denied by Bob Diamond, chief of Barclays, which derives most of its revenues from its investment bank. “Our retail deposits do not fund our investment bank,” he said. “There’s no transfer of funding.”
RBS’s Hester, whose investment bank is also its most profitable division, argued that ringfencing certain retail activities would “decrease banks’ ability to withstand risk and increase costs” and could “reduce the diversification of asset funding within banks”.
He added that it would exacerbate the problem of moral hazard by “creating a protected beast, the domestic banks” that would have explicit government backing.
During three hours of hearings, Horta-Osório also came under fire for pressing on with the sale of 620 branches despite Vickers’ desire for Lloyds to sell more. Committee chair Andrew Tyrie accused him of planning to present Vickers with a “fait accompli” on the deal in September.
BANK CHIEFS’ KEY POINTS DURING COMMONS HEARING
The banks were split on Vickers’ proposal to create a firewall between retail and investment banking activities. RBS chief Stephen Hester said that if there must be a ringfence, “make it incredibly small and tight so that in two generations’ time it’s not the halo of state protection”. But HSBC’s Douglas Flint said that a ringfence should follow standard accounting rules to make it easier to carve up banks’ balance sheets. Barclays chief Bob Diamond said that operational subsidiarisation, whereby the banks’ payments infrastructure is ringfenced, would be preferable. Hester also said that bail-in debt would be more effective at containing risk than a ringfence.
All the bank chiefs denied that market share is key to competitiveness in the retail market, with Hester calling size a “red herring” in the debate. Lloyds chief António Horta-Osório claimed that increasing the ease of account-switching would do most of the work to address competition issues, while HSBC’s Flint warned: “By designating [some banks] systemically important institutions, you concentrate activity in them.”
● CAPITAL RATIOS
Diamond said that Vickers’ recommendation for a 10 per cent core tier one capital ratio is too high for a “pro-growth bank”. The other banks said 10 per cent was now consensus, but Flint warned: “If we go much beyond 10 per cent... we will risk costs to the economy.”