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12 September 2011

What does the Vickers report mean for British banks?

In a major reorganisation, banks are to separate their retail and investment arms.

By Samira Shackle

UK banks should ring-fence their retail banking divisions to protect them from their “casino” investment banking arms, according to the Independent Commission on Banking.

The long-awaited report by Sir John Vickers has ordered radical change to banks’ operations to prevent another taxpayer bailout of the system. It suggests that banks be given until 2019 to implement the changes, longer than originally expected.

The report’s key recommendations are as follows:

1. Britain’s big universal banks (Barclays, HSBC and RBS) should be required to ring-fence their retail arms. This was widely expected.

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2. Those ring-fenced banks should have equity capital of at least 10 per cent of their risk-waited assets. This is higher than international standards.

3. Large UK banking groups should have primary loss-absorbing capacity of at least 17 – 20 per cent. This is likely to have a significant impact on the cost of doing business for Britain’s biggest banks.

4. Banks should be allowed to decide whether to include big corporate deposits and loans within the ring-fence or not. HSBC wanted them to be included, while RBS didn’t.

The BBC’s business editor, Robert Peston, who suggests that “arguably there has been nothing quite as significant for banks in more than a century”, explains the rationale:

The big idea behind the ring fence, the increase in capital requirements and the stipulation that providers of long-term unsecured loans should suffer losses when disaster strikes is to protect taxpayers.

The hope is that the costs of rescuing banks would fall on investors and lenders — rather than on taxpayers, as happened to the tune of many tens of billions of pounds in the meltdown of 2008.

The ring fence would also help regulators ensure that in another crisis, services deemed vital to the functioning of the economy, those inside the ring fence, could be lifted out and kept running.

What will this mean for the banks? It stops short of the full seperation advocated by Vince Cable in opposition, but predictably, the banks are still resistant. Lobbyists have expressed fear that it will reduce competitiveness and — you guessed it — cause banks to leave the UK. Over at the Sky News blog, Mark Kleinman says that senior executives have already told him that at least one bank will move their headquarters.

But others have negated this. Writing in the Financial Times today, former RBS chairman George Mathewson suggests that “the fears over the Vickers report are exaggerated, and that it will not be as radical or as costly to the banks as is represented”. Vickers says that the proposed reforms would cost between £4bn and £7bn, which is less than anticipated, and should be broadly seen as a manageable figure.

The signs are that the public, frustrated at a return to business-as-usual just three years after the Lehman Brothers’ crash, support the move. A recent Financial Times/Harris poll found that 51 per cent wanted big universal banks to separate their retail and investment banking arms, while only 6 per cent thought they should be left untouched.

The Chancellor, George Osborne, has made it clear that he will legislate on the plan, although it is not yet clear which of the reforms he will implement. He will give a more detailed response later in the autumn. It remains to be seen whether the proposals are watered down to take into account the fears of the banks.