Shares bounce on banks report

Published on Sunday 10 April 2011 20:52

THE City breathed a huge sigh of relief yesterday as the initial findings of a government- commissioned report into the banking industry spared its worst fears, sending many bank shares up sharply.

Banks should shield their retail arms from riskier investment banking activities and hold more capital to protect taxpayers from any future bank bailouts, the Independent Commission on Banking (ICB) said.

But, crucially, there was no demand by the commission for a complete break-up of retail banking and investment banking, the so-called universal banking model.

It will be seen as a significant victory for the likes of Royal Bank of Scotland and Barclays, which had spearheaded the campaign against such a split. They had claimed it would not benefit consumers and sharply disadvantage UK universal banks against foreign competition.

Barclays' shares closed up 2.8 per cent, or 8.2p, at 305.35p, making it the top riser on the FTSE 100 index, while RBS rose 2.3 per cent, or 1p, to 44.43p. Lloyds lifted a more modest 0.2p to 62.36p. HSBC dipped 4.7p to 660p.

But there was a big sting in the tail of the ICB interim report for Lloyds Banking Group, with commission chairman John Vickers and his colleagues asking for a "substantial" increase in the bank's enforced divestments.

The European Commission has ordered Lloyds to sell 600 branches, a fifth of its total, in return for the 17 billion taxpayer bailout it received in aggregate with HBOS after its rescue acquisition of the bank. The ICB said "this divestiture will have a limited effect on competition unless it is substantially enhanced".

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

Paul Mumford, senior investment director at Cavendish Asset Management, said: "The banks will be breathing a sigh of relief. Vickers and his colleagues have heeded bankers' warnings and have shied away from recommending a total split of retail and investment banking operations - the outcome banks feared the most.

"While the cost of capital will increase for the banks, the ICB's bark has proved much worse than its bite and its recommendations won't seriously damage the competitiveness of the sector."

Mumford added: "There is likely to be some horse-trading before the final report is produced in September and this could lead to further concessions for the banks. Either way, it is unlikely that more Draconian measures will be introduced at this stage. As a result, investors can feel confident that a line has been drawn in the sand."

Keith Bowman, banking analyst at Hargreaves Lansdown Stockbrokers, said the report brought "few surprises, with a possible exception being the kickback against the Lloyds-HBOS merger".He added: "'Ring fencing' is to become the order of the day, with capital cushions being bolstered and contingency plans to implement a potential wind down of a business drawn up.

"Nonetheless, the backdrop and underlying problem from a regulator's perspective is that banking has become a global business, a development hindering aggressive individual country action."

Meanwhile, consumer groups claimed rising financial capital cushions being considered by the commission - including 10 per cent for systemically important banks compared with Basel 3 recommendations of 7 per cent - are likely to be paid for by increased banking charges.