And plans for a tougher leverage ratio were also attacked, as it could push up the cost of mortgage borrowing and put the UK’s banks at a competitive disadvantage to foreign rivals.
The Parliamentary Commission on Banking Standards (PCBS) wants new laws to threaten banks with full separation if they stray from the spirit of the incoming rules on ringfencing.
This means a bank would have to dispose of parts of its business, rather than merely fence them off internally.
And the PCBS wants a review of the new ringfence after a few years to ensure it is working – and if not, to consider splitting banks completely.
“For the ringfence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to,” said PCBS chairman Andrew Tyrie MP.
“That’s why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it.”
And if this power is used several times, the PCBS suggests that even well-behaved banks should be split up.
“Significant use of this reserve power would indicate that full separation across the banking sector would be very likely to be the appropriate step,” the report noted.
The industry hit back, arguing the long-term, repetitive nature of the threat to split up all banks can only damage the sector and the economy.
“Having a sword of Damocles dangling over banks is not good for the UK – if we don’t know what the industry might look like in 10 years’ time, it is not conducive to encouraging lending,” said a finance source who declined to be named.
The City of London Corporation praised ringfences as a whole, but not the extra threat to break banks up, saying it was neither “necessary or appropriate to tackle effectively the issues that have arisen”.
The CBI echoed these comments, saying that while the threat of separation might “help to concentrate minds, such a move would be detrimental to businesses, preventing them from accessing the full range of services they need from a single provider”.
Last year’s Vickers report proposed a four per cent leverage ratio, but the government favoured three per cent in line with the global Basel III plans – a step opposed today by the PCBS, which wants a tougher approach.
The British Bankers’ Association hit out at the tougher limit, which could come into effect before Basel III. “Increasing the ratio would restrict the number of mortgages banks could agree to,” it added.