MPs raise concerns over ICB banking reform proposals

PRESSURE mounted on Sir John Vickers and his Independent Commission on Banking (ICB) yesterday after MPs rounded on its plans to reform the sector by forcing banks to ring-fence their retail arms.

The influential cross-party Treasury select committee warned that the ICB's interim report had not addressed certain issues - such as a full split of the banks and corporate governance - in enough depth.

The interim report, published in April, opted for separating retail and investment banks within a shared parent company instead of a full split to form two new companies. But in its own report on the ICB proposals, the committee of MPs said it needed to explain more clearly why it was against a full separation.

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The Treasury committee pointed out that the option had been covered in just one page of the ICB report. "This thin treatment by the ICB of full separation… is not convincing as a demonstration that full consideration has been given to this option," it said in a statement.

The ICB, which is chaired by Vickers who is a former chief economist at the Bank of England, was established last year to examine reforming a sector that was badly damaged by the credit crisis, resulting in the nationalisation of Northern Rock and part-nationalisation of Royal Bank of Scotland (RBS) and Lloyds.

It is due to publish its final report on 12 September and it will be then up to the UK government to decide on whether or not to adopt its measures.

Conservative politician Andrew Tyrie, who chairs the committee, has consistently criticised the ICB for not examining the issue of bankers' bonuses closely enough.

"The failure to address the issue of corporate governance was a serious omission in the ICB's interim report. It must be tackled head-on in the final report," he commented yesterday.

The heads of the UK's top banks have also expressed concerns that the ICB's proposed reforms may be counter- productive and warned they could constrain their lending activities and damage the broader economy.

Last month, RBS chief executive Stephen Hester had told the committee that the proposal to ring-fence different banking operations may backfire by making UK retail banks too adventurous in their lending.

Hester said while he did not oppose the principle of some sort of ring-fencing, it risked triggering "moral hazard" where banks lend in too cavalier a fashion in the knowledge they will be bailed out by the taxpayer or the authorities.

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Tyrie said the issues raised by the banking sector were "important objections. We believe Sir John needs to come out and demonstrate that his proposals would not have the negative or unintended consequences that his critics assert." On Monday, UK Financial Investments, which manages the government's stakes in RBS and Lloyds, warned that the sale of the shares could be delayed by uncertainty over regulation in the banking sector and specifically referred to the ICB's proposed reforms.

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