Retail activity to get explicit state backing

PROPOSALS by the Independent Commission on Banking (ICB) could deter competition and lead to the first ever explicit taxpayer subsidy of retail banks, according to industry experts.

“The implicit taxpayer guarantee of banks has become far more explicit with the ICB report making clear that retail banking businesses will be protected while investment banks will be allowed to fail,” says KPMG’s head of retail banking David Sayer.

The ICB yesterday released a report in favour of ring-fencing banks’ UK retail operations in order to make it easier for the government to support them during a crisis without also having to support “non-essential” wholesale activities.

The ICB has said that “the aim is to isolate retail banking” in order to allow banks to fail in a more orderly way, but the practical details of how a government could support one subsidiary of a bank while winding up the rest remain foggy.

Others have raised fears that ring-fencing a bank’s retail operations and imposing high capital requirements could deter new entrants by raising costs.

“The end point of this may be to make the whole business of making retail deposits fundamentally unattractive,” says Norton Rose partner Jonathan Herbst.

Much will depend upon how harsh the ICB makes its ring-fencing policy in the final report.

“We don’t know which assets might be included in the definition of a retail bank,” said one analyst. “Retail deposits will definitely be in there and trading activities definitely won’t be, but apart from that your guess is as good as mine.”