Banks warn industry shake-up will hurt customers

By SIMON WATKINS FOR THE MAIL ON SUNDAY
Updated: 16:27 EST, 9 April 2011

Customers will pay the price of any extra costs heaped on the banks by the Independent Commission on Banking, industry insiders warned this weekend.

But at the same time, critics of the banks insisted the ICB's long-awaited report must lead to action or Britain would miss 'the last chance' to reform them.

The ICB interim report, due out tomorrow, will include proposals to improve competition between banks and measures to ring-fence High Street services from riskier investment banking operations.

New proposals: High Street services and 'casino banking' could be split

The Commission will suggest a range of possible measures to set up firewalls between High Street and 'casino banking', as it has been dubbed by critics.

The most severe proposals could include forcing the banks to run the two types of business as entirely separate subsidiaries with their own pots of capital.

It is this idea which could push up the banks' costs. This is because raising cash for investment banking would be far higher if it were kept separate from less risky retail banking.

'Anything that adds to costs will lead to more expensive mortgages and other costs for customers,' said one banking source.

But some of the banks' fiercest critics in Parliament insisted last night that the ICB's proposals would have to be taken seriously, raising the political stakes for the Coalition Government.

Lord Oakeshott, until recently the Liberal Democrat Treasury spokesman in the House of Lords, said: 'The banks are very powerful and the Labour Government bottled out of dealing with them. This Government would not have set up a Commission like this unless it was expecting radical recommendations and was prepared to act on them. We are here as Liberal Democrats to make sure they do that.'

Lord Oakeshott, who said the ICB was the last chance to reform banking in the wake of the global crisis, stood down as a Liberal Democrat spokesman after the Merlin agreement between the banks and Government on lending and bonuses, which he described as 'pitiful'.

The Chancellor, George Osborne, who is understood to have received his copy of the report this weekend, was reported yesterday as being still firmly in favour of reform, though the Treasury has avoided making any comment ahead of the report's official publication at 7am.

Tomorrow's report comes after six months of investigations by the five-strong ICB, chaired by former Office of Fair Trading head Sir John Vickers.

Set up by the Coalition soon after the Election, the Commission was charged with investigating ways to make the banking system more stable and to improve competition for customers.

The report will be followed by a further six months of consultation and fine-tuning before a final document in September.

The banks most at risk from a radical reform agenda are the Lloyds Banking Group and Barclays. Lloyds has become the dominant High Street bank after its takeover of HBOS in 2009 and it could be forced to shrink itself to allow more competition.

Barclays would be most threatened by any forced division between investment and retail banking as it has become a significant global investment bank under the leadership of chief executive Bob Diamond.

Speaking on American television on Friday, US-born Mr Diamond appeared calm in the face of the ICB report. 'There is the challenge of the Independent Commission on Banking, which will be making its report on Monday, and things will be fine in how Barclays operates after that in our view. But there is uncertainty.' But behind the scenes, Barclays has been one of the most energetic in lobbying against a radical reform of the banking sector.

HSBC, with its major global business and investment banking operations, is also thought to be concerned about the pace of regulatory change in Britain.

Both banks are said to have considered quitting Britain if the regulatory regime becomes too aggressive. However, critics point to Britain's inherent stability as being too attractive to abandon and claim any suggestion they might quit is little more than blackmail by the bankers.

<h3>High Street services and 'casino banking' could be split
<p></h3>