Ringfences 'could have reduced banking bail-outs'

ROYAL Bank of Scotland may not have required such a massive taxpayer bail-out if its high street operations had been ringfenced from its investment banking division, it was claimed yesterday.

Sir John Vickers, chairman of the Independent Commission on Banking, defended its argument six weeks ago that protecting retail operations from risky wholesale banking was a preferred option to a complete demerger.

He told MPs on the Treasury select committee that ringfencing high street operations seemed "the most promising way" to reduce risk and avoid or reduce any future taxpayer involvement in Britain's banking industry. RBS received a 45 billion bail-out at the height of the banking crisis three years ago.

Vickers said such separate structures for high street and investment banking would at least mean any taxpayer interventions were "much more focused and smaller in scale".

He added that another advantage of ringfencing was that a parent company with a profitable investment bank "can bring help" if its retail arm hit trouble, a lifeline not available with complete demerger.

"We are not just saying do retail ringfencing. Each measure (in the ICB report] is imperfect. Put them together and you have a serious force," Vickers said.

Martin Taylor, former chief executive of Barclays and a member of the ICB, told MPs he believed it would have made a "big difference to RBS" if its investment banking and retail banking activities were ringfenced at the time of the financial crisis.

The ICB's evidence to the committee came as Moody's, the credit rating agency, threatened yesterday that it may downgrade 14 British lenders, including RBS, Lloyds Banking Group and Clydesdale Bank, because it said regulators appeared less willing to bail out banks in future.

Elisabeth Rudman, a senior credit officer at Moody's, said: "The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government.

"It has been initiated in response to guidance from the UK authorities (the Bank of England, the Financial Services Authority and the Treasury] that banks which fail in the future should not expect capital injections from the public purse."

Vickers also told the Treasury committee that even the "implicit" taxpayer support for the banking industry was equal to 1 per cent of GDP, and was also helping to finance bank bonuses.He said while it was extremely hard to be specific, a figure of 15bn of implicit taxpayer support for the big five banks was "realistic".

Asked by MPs if such perceived support for the industry, even for banks without explicit taxpayer backing, was helping to pay controversial banking bonuses, Vickers said: "Some of the bonuses have been financed that way."

The chairman of the commission, whose final report is due in September, added that it showed why there was understandable public anger about bonuses when "the taxpayer is manifestly on the hook for banks and some in the banks have been handsomely rewarded".