Markets shun banks on fear of ringfence
BRITAIN’S four biggest banks saw £3.5bn wiped off their value yesterday as investors fretted that chancellor George Osborne’s support for a ring-fence of their retail arms could push up costs and erode returns.
Barclays and RBS were the biggest fallers, losing 2.7 per cent and 1.9 per cent respectively due to their reliance on their investment banking arms for the lion’s share of their revenues.
The slump in prices was driven mainly by uncertainty, with analysts saying that they are none the wiser as to how the ringfence proposed by the Vickers Commission might work, despite Osborne’s backing.
One analyst said of the chancellor’s stance: “What is he telling us that’s new? As to the impact, it really depends on the form the ringfence takes.” The government seemed similarly at a loss, with a Treasury source saying: “The thickness and height of the [ringfence] walls still need to be designed”.
KPMG’s David Sayer said: “Until the chancellor sheds more light on the specific details of retail ringfencing, the banking industry is not much closer to understanding the full ramifications.”
The only consensus was the proposal will raise costs for the industry, with some of that likely to be passed on to consumers. PricewaterhouseCoopers’ Steve Davies said: “Forcing banks to ringfence their retail banking business could prove a costly exercise with unproven benefits for both the banking industry and consumers.”
So far, only one concrete proposal for a ringfence has emerged, with HSBC suggesting in its submission to the Treasury Select Committee that banks could segregate their assets on an accounting basis.
The proposal would see all assets that must be marked to market such as derivatives and other tradeable products in the wholesale bank, while all loans would be classified as retail. But the plan is fraught with practical difficulties and would harm retail banks’ ability to hedge loans.
RINGFENCE PROPOSAL | WINNERS AND LOSERS
BARCLAYS
● Barclays saw its shares drop 2.7 per cent to 257p as investors bet that it will suffer most from a ringfence because the majority of its revenues come from investment banking.
● Chief executive Bob Diamond (pictured) insists that there is no cross-funding between the bank’s retail and wholesale divisions and says the bank could live with a ringfence.
● But analysts have also said that Barclays is most at risk from ringfencing, with some estimating an impact of £1bn in post-tax costs.
Lioyds TSB
● Lloyds’ share price dropped 1.77 per cent to 47.7p. Chief executive Antonio Horta-Osorio (pictured) has voiced his support for a ringfence, saying it would “protect consumers”.
● The bank would be best off with as broad a ringfence as possible, since it is largely UK-focused with a small investment bank.
● Lloyds is more concerned with whether it will be forced to sell more than the 632 branches already on the block, but the chancellor made no mention of the issue yesterday.
HSBC
● HSBC’s shares lost 1.2 per cent, closing at 608.8p. The bank is already highly subsidiarised and derives most of its revenues from abroad in divisions that would not be subject to the ringfence.
● The bank, run by Stuart Gulliver (pictured), has so far come up with the only concrete proposal for how a ringfence would work, suggesting that all assets that must be marked to market be classified as wholesale and all loans as retail. But some derivatives used to hedge retail loans like mortgages would stay on the retail side.
RBS
● RBS’s shares fell 1.93 per cent to 40.7p as it, like Barclays, suffered from its reliance on its investment banking arm for most of its revenues.
● Chief executive Stephen Hester (pictured) has said that any ringfence should be as “tight and narrow as possible” to avoid including risky activities.
● This formulation would also benefit RBS the most, because it could simply segregate its retail deposits and some liquid assets on the retail side and continue its investment banking operations.