Banks battle watchdog bid to split roles

BRITAIN'S banks are expected to step up their opposition to any break-up plans after the man leading an inquiry hinted yesterday that some form of separation was inevitable.

• Warning: Sir John Vickers

Sir John Vickers, chairman of the Independent Commission on Banking, fell short of saying the banks should be fully broken up - but warned that their retail and investment banking operations may be ringfenced or separately capitalised.

Banks are likely to be relieved that the ICB is moving away from a full break-up but talk of separating and ringfencing functions was criticised by one leading banker who said it would be impractical and costly to implement.

In a speech at the London Business School, Vickers said "the ICB is unlikely to favour radical forms of narrow or limited purpose banking", but said measures had to be taken to secure the stability of banks.

"The failure of retail banking services would be especially damaging in terms of wider economic and social costs," he said. "Retail, including SME (small business], customers are more dependent on their banks than larger corporate customers, and perceived jeopardy to the continuous provision of those services, particularly by major retail banks, would not only have serious effects on economic growth but could also cause widespread panic amongst the public.

"One response to this concern could be somehow to ringfence the retail banking activities of systemically important institutions and require them to be capitalised on a stand-alone basis."

He said global investment banking represented a particular challenge and "credible resolution would seem to require at least some form of separability".

But bank bosses have expressed their concern over any break-up of functions. In an interview yesterday Peter Sands, chief executive of Standard Chartered, rejected criticism of the universal banking model, arguing that "Balkanisation" of the banks would only increase the probability of failure.

He said there was a lot of "muddled thinking" about the use of funds from some parts of the business, such as retail deposits, to pay for the activities such as investment banking. He said a structural approach did not tackle the underlying issues, would add to costs and "probably have a negative impact on competition".

The Independent Commission on Banking - which was unveiled by George Osborne in June - was created to consider reforms to the banks that would "promote financial stability and competition". Its aim is to make policy recommendations with a view to reducing the likelihood and impact of banks collapsing, and to consider the competitive advantage held by larger institutions deemed "too big to fail".

The commission will publish an options paper in April and has until September to make its recommendations to the government.

Vickers, the former head of the Office of Fair Trading, chairs a group of five whose other members are Martin Taylor, a former chief executive of Barclays; Clare Spottiswoode, the former director general of Ofgas; Bill Winters, former co-chief executive of JP Morgan Investment Bank, and Martin Wolf, the chief economics commentator at the Financial Times.