Banks braced for Vickers reforms

THE safety benefits of a ring-fence around retail banks will be worth the costs, Sir John Vickers will claim this morning.

Presenting the final report from his Independent Commission on Banking (ICB), Sir John will reiterate his proposal that Britain’s biggest banks be forced to hive off their retail operations into a separate subsidiary from their wholesale activities.

Analysts have put the cost of the policy at billions for the industry, with many calculating a rise in funding costs for wholesale banks of 100 basis points, which would be passed on – but Sir John will say the stability benefits are worth it.

There are fears that these higher costs could translate into depressed lending to consumers and businesses, threatening an already feeble recovery.

Banks will now turn their attention to the timetable for implementation, which will be determined by the Treasury. “We think it’s a really good piece of work,” a Treasury source said yesterday. “The chancellor thinks Sir John and the commission have done a good job.”

Despite the warm endorsement, there is wide room for manoeuvre for the Treasury and the Cabinet Committee in charge of implementing the report, which includes Vince Cable and Sir Stephen Green.

The best-case scenario for banks could be a decision by the Treasury to make ring-fencing a part of broader ongoing regulatory change.

City A.M. understands that banks were told last week that the ring-fence requirement could be included as part of a series of measures currently being introduced to require lenders to draw up orderly wind-up plans should they get into trouble.

A “soft” form of the ring-fence would require banks to make plans for the orderly separation of their retail and wholesale assets should they get into trouble, but still allow them to cross-sell and transfer capital between their businesses.

A banking source said that there appears to be some support for this approach in 10 Downing Street and the Treasury, but it could be overruled by others in the Treasury and the Department for Business who believe it is politically necessary to legislate separately for a ring-fence.

The report also lays out measures to improve competitiveness in banking, including proposals to make it easier for consumers to switch accounts.

And Lloyds expects Vickers to have agreed to a conciliatory position regarding its sale of 632 branches, which the ICB had said must be “substantially enhanced”. As revealed by City A.M. in August, the ICB backed away from calls for more branches to be sold after discussing the sale with bidders.