The interim report on Banks & Competition was issued this week by the Independent Commission set up by the government. It was immediately criticized as not going far enough by some. A comment received here on our Blog (see Chairman?s Blog/Categories/Bankers & Bonuses in the right-hand index column) also called it a complete whitewash! In contrast, the head of this Independent Commission, Sir John Vickers, denied claims that the banks would be driven offshore if his recommendations were implemented. He said that the banking system would instead be made safer and more competition encouraged by e.g. separating into independent subsidiaries a ring-fenced, systemic part which is not allowed to fail i.e. retail banking operations, and the other investment bank part which can fail. The dominant retail market position of Lloyds would also be reduced by their selling off of more high street branches.
A spokesperson for Metro Bank, a recent entrant and independent competitor in the banking market, was not impressed and viewed the recommendation for Lloyds to sell off more branches as pretty limited competition-wise. More was needed to promote competition and the proposals did not go far enough e.g. the regulatory process could be made easier whilst still protecting the consumer of course. Making it easier for customers to switch their accounts between banks would also encourage more competition.
Despite RBS (Royal Bank of Scotland) being said at the time of the banking crisis as 2 hours away from a complete collapse, the ideas of the Commission on how to protect the high street banks stopped short of recommending a complete split-up and they chose ring-fencing of the retail part instead. A commentator then saw the problem as the devil in the detail i.e. in getting the firewall in the right place to ensure nothing in terms of a financial contagion could get through from the more at risk investment subsidiary. In addition, protecting the UK-based retail services part of the banks would not be enough to protect them from their global operations. Metro Bank again saw separating the banks as also bad for business with fire-walls and ring-fencing of independent subsidiaries requiring the holding of more capital e.g. in the investment arm if formerly supported by the retail deposits. However, to completely split the banks apart could itself be a bad thing when taking the example of the HBOS (Halifax & Bank of Scotland) merger which was a bad deal at the time and would remain so despite selling off more branches to encourage competition.
A spokesperson for the CBI (Confederation of British Industry) said that they and Business in general were determined to keep the major banks head-quartered in the UK, noting that HSBC had been talking about moving their HQ abroad for some 30 years now. The challenge for the banks now is that not only are they being asked to up their lending levels to businesses but also to up their capital bases.
It will be interesting to see what results from the next 6 months of consultation now foreseen to take place with all interested parties before the final report is issued and whether the final recommendations are implemented.
Tags: banks, bonuses, competition