Banks are off the hook – but customers will suffer

WHEN? the coalition government launched the Independent Commission on Banking (ICB) shortly after coming to power, it was clearly kicking party differences into the long grass. At the time, Vince Cable, a far more powerful figure before his “war on Murdoch” gaffe, would settle for nothing less than a full-scale separation of retail and investment banking while George Osborne preferred a UK?version of the Volcker rule that prohibits proprietary trading and some other “risky” activities (interestingly, both options were effectively dismissed by the commission yesterday). But you can only park an issue for so long.

The ICB’s findings come hot on the heels of an astonishing regulatory assault on the UK’s banks including –?among other attacks – the most onerous regime governing remuneration and bonuses in the world. The big worry for the government, indeed for the UK, was that the ICB report would be the straw that broke the camel’s back, the catalyst for a quick exodus of Britain’s banks. Thankfully, that isn’t yet the case.

While ringfencing could prove costly for RBS, Barclays and HSBC, they will still be able to capitalise their investment banking powerhouses according to internationally agreed standards while maintaining what is essentially a universal banking model. Lloyds is of course the loser, due to the announcement that the 600-odd branches earmarked for divestment could be insufficient.

In retail banking, it is the customer who will lose out. Higher capital requirements – which are sure to be passed on to consumers – will prove a barrier to entry for insurgent banks. And various regulators are now trying to control so much – from dividends and pay to capital levels – that they might as well impose a return on equity ceiling. Such changes will make it ever more difficult for banks to compete on price.