As George Osborne promises bonuses crackdown - is time running out for British banks?

By SAM FLEMING FOR MAILONLINE and SIMON DUKE FOR MAILONLINE
Updated:

George Osborne vowed to tighten the regulatory leash around the banking sector as the backlash against the City intensifies.

The Conservative Shadow Chancellor demanded a fullblown Competition Commission inquiry as part of efforts to limit larger banks' ability to ' dominate the market'.

This would include examining the draconian fees that investment banks impose on corporate deals and fundraisings, according to the Tories, a day after Labour City minister Lord Myners raised concerns about skyhigh charges being imposed in the Square Mile.

Backlash: Bankers in Canary Wharf are among many who face a Christmas crackdown on bonuses

Backlash: Bankers in Canary Wharf are among many who face a Christmas crackdown on bonuses

Osborne's warning came after Britain's bailed-out banks were left in no doubt of the fate that awaits them at the hands of Brussels regulators.

To escape the wrath of the European competition watchdog, ING moved to split off its insurance arm and tap its longsuffering investors for £6.8bn.

The scale of the restructuring move has intensified fears that Lloyds will have to unpick much of last year's takeover of Halifax Bank of Scotland.

'This is a strong signal that the Commission means business,' warned one official source. 'Lloyds and RBS are going to have to take bloody drastic action.'

Shares in Lloyds tumbled 6.86p to 89.37p. Shares in RBS, which may be forced to sell off huge swathes of its corporate lending business, fell 2.65p to 44.43p.

Under a Tory government, the likes of RBS and Lloyds would be called on to justify the power they wield in the UK banking market, Osborne suggested.

'A prerequisite is a Competition Commission investigation into the current banking sector, because one of the consequences of all the events of the last few years has been a huge amount of consolidation and a removal of certain participants.'

The Shadow Chancellor also demanded a Christmas crackdown on big UK lenders' bonus payouts - tipped to reach £6bn this year.

The financial meltdown has led to demands for far tougher regulations, as the City is nursed back to health with the help of over £1trillion of British taxpayer-money. Despite tough talk from Labour and the Tories, it is unclear how far the new rules will be pushed given the City's importance to the UK economy.

Bank of England governor Mervyn King claimed there had been 'little real reform' of the sector so far, as he argued retail banks should be split from their investment arms.

Osborne said King had made 'a strong and persuasive case', but he said action must be internationally coordinated.

Most watched Money videos