British banks urged to ring-fence retail activities

11th April 2011, Comments 0 comments

Britain's banks need to protect retail operations from investment banking activities, and set aside more capital to prevent more state bailouts, a government-commissioned report said on Monday.

The Independent Commission on Banking, delivering initial findings on financial stability and competition, called for a "ring-fencing" of retail businesses that would not allow investment division losses to sink banks.

The report follows fierce criticism over so-called casino banking -- a term commonly used to describe the high risks taken by investment bankers denounced for their role in the infamous global financial crisis of 2008.

The ICB also proposed raising capital ratios and recommended that state-rescued Lloyds Banking Group sell more assets to boost competition.

"The Commission is ... considering forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group," the ICB said in its provisional report.

"This would require universal banks to maintain minimum capital ratios and loss-absorbing debt for their UK retail banking operations, as well as for their businesses as a whole.

"Subject to that, the banks could transfer capital between their UK retail and other banking activities."

The government-appointed Commission, which will publish its final report in September, is seeking to protect borrowers and savers in the event of another financial crisis.

Britain's Conservative-Liberal Democrat government formed the Commission last year, sparking speculation it could force a drastic overhaul. However, the eagerly-awaited review did not call for the banks to be broken up, as some argue is necessary for real reform.

Deputy Prime Minister Nick Clegg praised the ICB for encouraging competition and safety.

"It is not right to have very high-risk and very low-risk banking activities so intertwined so that when something goes wrong it is the taxpayer that picks up the bill," said Clegg, who is leader of the Liberal Democrats.

"All that is absolutely crucial, is that the banking system must be made not only competitive but also safe."

The Commission added that banks should raise core capital ratios to "at least" 10 percent, significantly more than the 7.0 percent required by 2018 under new international "Basel III" rules that were agreed in September.

The ICB also called for improved measures to help consumers switch current accounts.

"We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ring-fence idea," ICB Chairman Sir John Vickers told BBC Radio 4.

Britain's banks were ravaged by the financial crisis, resulting in the nationalisation of Northern Rock and multi-billion-pound rescues of Royal Bank of Scotland and Lloyds Banking Group.

The ICB also criticised the previous Labour government for allowing Lloyds to buy struggling rival Halifax Bank of Scotland (HBOS) -- saddled with high-risk property investments -- in 2008 as the crisis unfolded.

"At the height of the crisis in 2008, Lloyds was allowed, contrary to the normal takeover rules, to acquire HBOS," Vickers noted.

"This was certainly not good for competition and it turned out to be bad for financial stability as well because the HBOS problems infected the much larger Lloyds group."

The report added that Lloyds needed to sell off more assets, on top of the 600 branches that it has been forced to sell by the European Commission in return for approval of the state aid it has been given.

In reaction, Lloyds expressed surprise at the announcement and attacked the ICB for a proposal which "would not be in the interest of our customers.

"We are surprised that the ... report is proposing a potential expansion of Project Verde (LBG's branch closure programme) which we believe is not in the interest of our customers," Chief Executive Antonio Horta-Osorio said.

"This option appears to be based on limited evidence and may paradoxically potentially delay a new competitor coming into the UK market."

© 2011 AFP

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