22 Jan 2011

Banking inquiry targets sector break-up

Sweeping reforms that could break-up Britain’s biggest banks will be the central focus of the banking inquiry in the coming months, the head of the commission said today.

Sir John Vickers said the Independent Commission on Banking is considering plans to split investment banks from their high street retail arms.

Speaking in central London today he said the ICB was exploring ways of ring-fencing retail banking arms in order to safeguard ordinary deposit accounts from risk.

Sir John said the banks’ failure to manage risk during the financial crisis had been “spectacular” and “should not have caused havoc on anything like the scale experienced”.

“Rather than suffering a ‘perfect storm’, we had severe weather that exposed a damagingly rickety structure,” he added.

The structural reform of banks could therefore see the separation of retail and investment banking, though he admitted “the boundaries between them are fuzzy”.

“Our response to this concern could be somehow to ring-fence the retail banking activities of systemically-important institutions and require them to be capitalized on a stand-alone basis”, he said.

While Sir John admitted there were questions over the practicalities of such a split, he said the reforms were desirable, firing a warning shot to Britain’s bigger banks.

“If the probability and/or impact of bank failure – particularly of retail service provision – can be reduced by forms of separation between banking activities, then so too might capital requirements.

“If so, the case for structural reform might be greater the higher is the cost of bank capital,” Sir John said.

The commission, which was set up by George Osborne last June, is almost half way through its review of the banking sector.

It was set up to promote financial stability and competition in the sector, aiming 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 has held five public events around the UK gathering research from the public and the financial institutions themselves. It will publish an interim report in April and has until September to make its recommendations to the government.

Sir John, a former chief economist at the Bank of England and former head of the Office of Fair Trading, is chairman of the five-man commission.

The 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.

Sir John was speaking at a London Business School conference this afternoon.