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Industry analysts insist commission's reforms could have been worse as banks are let off the hook until 2019
Reforms to overhaul the banking sector have been kicked into the long grass, unions claimed, after the deadline for implementing a "ringfence" around high street banks was set for 2019.
While the reforms were regarded as hitting Barclays and bailed-out Royal Bank of Scotland hardest, bankers conceded that the recommendations by Sir John Vickers and his independent commission on banking (ICB) could have been worse given some of the calls for radical reform made during last year's election campaign.
Rather than proposing a full-scale separation of retail banks from "casino" investment banks, Vickers yesterday called for a ringfence to be put up between the two types of business in an attempt to get taxpayers "off the hook" in the event of another financial crisis.
Those hoping for radical and immediate reform, almost four years after the run on Northern Rock and nearly three years to the day that Lehman Brothers collapsed, were disappointed after Vickers conceded that rapid implementation of his reforms was not practical.
Bank shares gyrated widely on a day of heightened anxiety in the eurozone, at times edging higher before closing down. RBS was among the hardest hit, losing 3.4% to close at 20p. Rival bailed out bank Lloyds was down 1.6%, at 30p. Barclays fell 1.6% and HSBC 2.3%.
David Fleming, a national officer at the Unite union, said: "The proposals set out today kick the overdue reform of the banking sector into the long-grass ... Simply creating a firewall is at best a weak gesture and at worst a pointless act which will not in any material way impact the behaviour or culture at the top of the banks where this crisis was born."
But Vickers, who was appointed to chair the ICB in June 2010, rejected suggestions that the reforms would not force sweeping changes to the sector that, with a combined balance sheet of £6tn, is four times larger than the size of the economy and still reliant on the taxpayer to keep functioning.
Asked why he did not decide on a total separation, Vickers said: "Because a strong ringfence can get the same, if not more, stability benefits at much lower economic cost. In particular, if one part of the bank is doing well, it can still support the other."
Martin Taylor, the former boss of Barclays and one of the Vickers' commissioners, went even further by insisting ringfencing was a better solution.
"This is not a wishy-washy compromise," he said.
Ian Gordon, an analyst at stock brokers Evolution, said the proposed reforms were not the worst scenario, despite the £4bn to £7bn cost that Vickers admitted will be incurred to implement the changes and ease the industry of taxpayer support.
"The ICB report is unwelcome and unhelpful but it could easily have been a whole lot worse," said Gordon.
"Whereas we continue to regard the recommendations of the ICB as likely to permanently increase the risk of instability within the UK financial services sector with materially adverse consequences for the broader UK economy, some of the worst excesses of the extremist 'reform' agenda appear to have been mitigated."
After 14 months of deliberation, the ICB, tasked with finding ways of avoiding another taxpayer bailout and increasing competition on the high street following the dominant position handed to Lloyds when it rescued HBOS during the 2008 banking crisis, produced a 358 page report containing the following key points:
• Domestic retail banking services should be put inside a ringfence, while global wholesale and investment banking should be outside. The commission is vague about whether banking to large companies should be in or outside the ringfence.
• Ringfenced banks should have a capital cushion of up to 20% – comprising equity of 10% (as trailed in the ICB's interim report in April and higher than the 7% international amount) with up to another 10% of additional capital such as bonds. It was not immediately clear, however, whether the UK will be able to impose higher capital standards than those mandated by the EU.
• Lloyds Banking Group no longer needs to sell off more branches to meet EU rules on state aid.
• It should be easier to switch bank accounts.
• The industry should be referred for a competition investigation in 2015.
While the reforms disappointed some campaigners, one bank chief executive is said to have described them as disastrous for his bank and the UK economy.
The commissioners dismissed this, however, insisting the competitive position of London as a financial centre would not be damaged by the reforms, which are intended to remove the support of the taxpayer from the industry.
"If a bank effectively says I'm here because I get a UK taxpayer subsidy and without that I don't want to be here, then it's not a good idea for the UK to say 'please stay, we're quite happy to subsidise you'," Vickers said.
He also insisted that the price of the reforms would not be passed on to retail and small business customers, saying the bulk of the pain would be felt by customers of the non-ringfenced part of the bank.
- Banking reform
- Banking
- Financial sector
- Financial crisis
- Royal Bank of Scotland
- Lloyds Banking Group
- Barclays
- Banks and building societies
- Consumer affairs
Jill Treanor
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