Vickers casts shadow over banks' falling share prices

Published on Sunday 23 January 2011 20:52

BANK shares were hit yesterday amid mounting fears the sector's high street activities might need bigger capital buffers to protect them from riskier investment banking operations.

Two of the biggest fallers were part-taxpayer owned Lloyds and Royal Bank of Scotland, with analysts saying there were also continued worries about their exposure to Ireland amid that country's economic and political turmoil.

The stock market pressures came after Sir John Vickers, chairman of the Independent Commission on Banking, said at the weekend that he favoured "ring-fencing" retail banking operations.

Vickers said this would help ensure depositors' funds were not used to subsidise their more risky wholesale divisions, sometimes criticised by politicians as "casino banking".

However, analysts said the market was disturbed that it could mean banks would need to hold more capital to protect their retail banking arms.

James Chapell, banking specialist at broker Olivetree Securities, said: "Investors remain concerned that the ICB will continue to increase pressure for higher capital ratios."

Paul Mumford, senior investment director at Cavendish Asset Management, said that at first sight the notion of "segregating riskier investment banking from customers' money in the form of deposits" was sensible.

"However, the commission ought to bear in mind that simplistic tinkering in a sector so vital to the recovery carries its own dire risks," Mumford added.

"One worries whether the powers that be have fully estimated the potential effects of any radical restructuring on UK Plc. Vickers is right to reject a simple Glass-Steagall-esque split (of retail and investment banking], but even weaker moves in this direction could have disastrous consequences."

Lloyds, 41 per cent owned by the taxpayer and with the smallest wholesale banking business of the big five UK banks, was the biggest stock market faller. Its shares closed down 3.4 per cent, or 2.32p, at 65.05p.

Royal Bank of Scotland, in which the government owns 84 per cent, fell just under 2 per cent, or 0.86p, to 44.08p. Barclays was off 0.4p at 300.5p, while HSBC edged up 1.4p to 697.2p.

Analysts say radical changes could be expensive for Barclays, RBS and other universal banks, which combine retail and investment banking, but the ICB is not due to make recommendations to the government until September.

"Splitting up the banks would be a Draconian approach but there are other ways to reduce the scale of the capital markets operations or find ways of changing the protection (of retail banking]," said Colin McLean, managing director of SVM Asset Management in Edinburgh.

One banking analyst said: "The reaction in banking shares today was partly because the market does not like interference by the government. But the political and economic disarray in Ireland should not be overlooked as a reason, particularly for RBS and Lloyds."

It is understood Bob Diamond, the former Barcap investment banking chief who is the new chief executive at Barclays, is considering a scheme to pay a large part of the bank's top staff bonuses in bonds that turn into equity if a bank hit trouble. The bonds are known as contingent capital securities, or CoCos.