Breaking up the banks … Review set to say HBOS takeover was a mistake

Published on Sunday 10 April 2011 20:17

AN INTERIM report into a review of the banking sector is expected to conclude today that allowing Lloyds Banking Group to take over HBOS was a mistake because it left the bank with too much market share.

The Independent Commission on Banking (ICB), which is investigating how to stabilise the sector and avoid future bail-outs, could call for banks' retail arms to be split from their investment arms in a move insiders say would make it cheaper to relocate overseas.

Big banks, including HSBC, Barclays, and Standard Chartered, have hinted they could leave London if theICB suggests measures that drive up the cost of being based in the UK, according to reports yesterday.

But a Treasury insider said Chancellor George Osborne thinks it unlikely that any bank would leave this country.

He said: "We take much of this with a pinch of salt. Nobody is leaving things the way they were before the crisis.

"If Bob Diamond is serious about taking Barclays to New York, he should listen to Jamie Dimon of JP Morgan, who has been complaining about the new regulatory framework there.

"Does anybody really think HSBC would want to go to China? There are all sorts of reasons why that isn't going to happen."

• Who's who of banking watchdog

The commission was set up after the financial crisis left Britain with one of the most highly concentrated retail banking markets in the world, with the top five groups accounting for 85 per cent of UK personal current accounts and 70 per cent of savings accounts.

The commission is likely to outline several recommendations, which it will narrow down before its final report in September, it was reported yesterday.

It is expected to suggest that savers should outrank other creditors in the event of a bank going bust.

This would mean bondholders would see their loans converted into shares to cut the risk of taxpayer bailout.

The report could also call for banks to isolate their UK businesses in separate companies backed by their own capital and place all key operations, such as payment systems into a ring-fenced company that could still operate even if the bank went under.

Other suggested measures to boost competition, such as making it easier to switch accounts and making pricing more transparent, are also thought to be on the cards.

The Treasury declined to comment.

The Chief Secretary to the Treasury, Danny Alexander, denied that there was any "tension" between the Conservative and Lib Dem coalition partners over the extent of any break-up between investment and retail arms.

There were reports that Lib Dems wanted to go further in breaking up the banks whereas Mr Osborne preferred to ring-fence operations without formally splitting up institutions.

Mr Alexander refused to anticipate the precise details of today's proposals, but stressed: "Our priority as a government is to ensure that those people who recklessly gamble with our economy are no longer able to be bailed out by taxpayers. People who do that should be made to take responsibility themselves."

Shadow chancellor Ed Balls said it was very important" the commission's proposals were acted on fully. "So many families and businesses have suffered, we need accountability, we need transparency, some tough firewalls to protect the taxpayer from those risky activities the banks do, some more competition."

Background

The Independent Commission on Banking was set up by the coalition last June to conduct a full review of the sector after the financial crisis three years ago left several banks needing bail-outs.

Its remit was to look at financial stability and competition after the banking meltdown.

The ICB made clear from the outset that it would ask hard questions about the structure of the sector. At the heart of its investigation lay two aims for reform – to make banks safer and to improve competition.

The watchdog is also looking at ways to ensure banks are not "too big to fail" and that greater protection is offered for customer deposits.