HBOS takeover was a 'mistake' says bank inquiry chief

THE man leading the government's inquiry into Britain's banks has called Lloyds' acquisition of HBOS a "mistake", prompting further speculation over a possible break-up.

• "It would appear to have been a mistake to waive normal merger law" Sir John Vickers

The comments by Sir John Vickers, chairman of the Independent Commission on Banking, were made earlier this year in a speech drafted before he was invited to head up the ICB.

However, the revelation is bound to add to a growing suspicion that the five-member panel may recommend the merger be unravelled.

Vickers, a former chief economist for the Bank of England, told the Bank of International Settlements in June that the relaxation of competition law which paved the way for the purchase of HBOS two years ago "was not a good way to help financial stability" at that time.

His notes to the document highlighted the fact that the draft paper, written in his capacity as an academic, had been put together "well before" the invitation from Chancellor George Osborne to chair the banking commission, though they were presented in Switzerland nine days after his appointment. They were published on the BIS website yesterday.

The deal was conceived at the height of the banking crisis to save HBOS from collapse. Ministers in the then Labour government waived normal competition rules to expedite the shotgun wedding, which has proved to be among the most contentious deals in recent memory.

"An outside observer not privy to the full facts cannot speak with total confidence, but it would appear to have been a mistake to waive normal merger law to address the HBOS problem once it was clear, as it was by early October 2008, that a systematic solvency problem existed," Vickers told the BIS.

The revelation will put further pressure on the banking commission to prove its impartiality as it considers the best way to encourage competition in the retail end of the sector. Its recommendations on this, as well as wider measures to promote stability across the banking industry, are due to be reported next September.

The possibility of unpicking the Lloyds-HBOS deal came under the spotlight last week, when commission panel member Clare Spottiswoode dropped strong hints that reversing the merger is among the ICB's options.Chairing its first public meeting in Leeds, the former head of gas regulator Ofgem noted that the competitive market for financial services was currently not very healthy.

"We might suggest reversing what happened on that day a few months back when Lloyds took over another bank," Spottiswoode told the surprised audience.

Her comments have fuelled speculation that the banking commission may have more to say on the issue of competition than on the structure of groups that combine retail and investment banking. They also prompted an appeal from outgoing Lloyds chief executive Eric Daniels, who called on the coalition government to honour the pledges of its predecessor.

"One of the things that characterises most modern governments is that when you make an agreement with the state, it's an agreement with the state, independent of which political party is in power," he said.

ICB sources said yesterday that Vickers' statements to the BIS were his own views, and that many others in the industry hold similar opinions. They also stressed that finding fault with the circumstances of the merger was not the same thing as advocating its undoing.

"The commission has reached no conclusions on what recommendations, if any, to make in relation to competition in retail banking," a spokesman said.