Martin Flanagan: ICB report is no damp squib, but is short of being a firecracker

Published on Sunday 10 April 2011 19:52

LLOYDS Banking Group gets a kicking, other major UK banks slouch away with mild bruising and probably a private "phew" of relief. That's the obvious inference from the provisional conclusions of the Independent Commission on Banking.

On the key issue of whether banks' high street deposits-to-mortgages-and-SME-lending should be split from so-called casino investment banking, the commission has taken the moderate option. That, however, should not be confused with the soft option (more of which later).

But as the grandstand of speculation focused on how far the ICB would go in urging a homegrown Glass-Steagall Act, up on the rails came the dark horse of the additional bashing-up of Lloyds.

John Vickers, head of the commission, together with his colleagues, make no bones about it. They favour a substantial increase in the business Lloyds should have to get rid of on top of the 600 branches already ordered by the European Commission in return for the bank's multi-billion pound taxpayer bailout.

Vickers would not give numbers, or say what the ICB would consider an acceptable market share for the bank in key areas like current accounts.

But one would think, for instance, that anything other than at least an extra 200 branches being ordered to be sold would not be considered a "substantial" change to the EC requirement, i.e. a one-third increase on what is being demanded by Brussels.

The ICB obviously still feels uncomfortable about Lloyds, in return for its rescue takeover of HBOS, getting rule-busting market shares on the high street, such as about 30 per cent of current accounts and mortgages and 17 per cent of deposits.

It seems the bank has been less successful in lobbying against further punitive action on the retail side than Royal Bank of Scotland, Barclays and HSBC have been on the merits of protecting universal banking.

Coverage in full

• Livid Lloyds bosses defiant over banking report

• Changes at a glance

• Mark Littlewood: Sir John Vickers has asked the right questions, but few answers

• Shares bounce on banks report

• Martin Flanagan: ICB report is no damp squib, but is short of being a firecracker

• Gordon Brown confesses he made mistake over financial regulation

And, in the wider shape of things, you could now reasonably argue that the banks have won on no new Glass-Steagall (the Depression-era legislation in the US that separated retail and investment banking); have won on the bonus issue (the politicians essentially bottled it with a bonus levy fig leaf); the banks have won a partial victory on levels of disclosure of remuneration; and have kept business lending commitments within reason and with plenty of get-out clauses.

Subconsciously, the commission may have brought a heavier hand down on Lloyds precisely because it went for the moderate option of a ring-fencing "subsidiarisation" of retail from wholesale banking rather than a Draconian complete firebreak.

Lloyds will gather a lot of the consumer protection headlines, and may stop the commission's interim proposals being dismissed as toothless and largely a victory for the bankers.

The ICB makes much of insisting that it wants a minimum core capital ratio to assets of 10 per cent for systemically important UK banks compared to the 7 per cent baseline proposed by Basel 3.

But the big banks are officially or unofficially around that 10 per cent level already so they are hardly going to be unhappy about what is being proposed.

Companies like to hear they are giving the authorities what they want before the authorities ask for it. And banks will still be allowed to cross-subsidise retail and investment banking under current ICB thinking: another win. However, one should not just dismiss the commission's line in the sand on protecting retail banking from the excesses of wholesale banking just because it does not go the whole hog and demand a complete split.

Ensuring that high street banking is done as a separate subsidiary within larger banking groups, with its own cast-iron capital ratios, would go a long way to avoiding Northern Rock-style runs on household names. A moderate approach is not just a cop-out, it can, in protecting universal banking, be a way of avoiding cutting off your investment banking nose to spite your retail face.

To know that getting your wages, being allowed to withdraw money from the hole-in-the-wall and paying your standing orders, etc, will all be ring-fenced as an investment banking division in trouble is being sorted out or wound down would definitely help consumer confidence.

And the commission has sensible things to say on easing the portability of accounts. In the round, the ICB's initial findings are not a damp squib, but are short of a firecracker attached to the banking industry's tail.

As in football, the league table at the end of the season doesn't lie - share prices are the giveaway in judging regulatory moves.

Royal Bank of Scotland and Barclays both put on well over 2 per cent yesterday, while Lloyds largely trod water. That doesn't suggest an industry that has been sandbagged.

There will be cautious industry noises, but private relief.