Watchdog may break up 'too big to fail' banks

The group, which is 83% owned by the Government, said it returned to the black in the final three months of the year (GETTY IMAGES)

A new Government banking watchdog today revealed it will consider splitting up "too big to fail" banks to break their stranglehold on the high street under a year-long probe into bank reforms.

A new Government banking watchdog today revealed it will consider splitting up "too big to fail" banks to break their stranglehold on the high street under a year-long probe into bank reforms.

The Independent Commission on Banking (ICB) said it will ask "hard questions" on the structure of Britain's banks, looking at whether to break up big groups to improve competition and separate retail from investment banking operations.

Retail banking is dominated by the big players following the financial crisis, with the top six groups accounting for 88% of UK deposits.

But the ICB said today it would explore the most radical options that could force market leaders such as Lloyds Banking Group to sell off assets.

It will also consider plans to hive off investment banking businesses from retail deposit operations, potentially putting the likes of Barclays and HSBC in the firing line.

Calls to ring-fence deposits from so-called "casino" banks have mounted since the credit crunch, with Business Secretary Vince Cable a vocal supporter of so-called "narrow banking".

But the commission faces a difficult balancing act amid growing threats of a bank exodus from the UK after recent threats from banks such as HSBC and Standard Chartered.

It also risks increasing the cost of credit to consumers if recommendations are too harsh on lenders.

Sir John Vickers, the former chairman of the Office of Fair Trading, who has been tasked with chairing the ICB, stressed today's opening report was a "questions paper and not an answers paper".

The commission will weed out the least practical options for an interim report on potential solutions next spring.

Sir John said: "Experience shows that the risks from not asking hard questions about financial stability and competition are far greater than from doing so.

"Questions about the structure of banking need to be debated in an open, rational way, and we would like to invite anyone with an interest to provide us with views and evidence."

But Stephen Hester, chief executive of part-nationalised Royal Bank of Scotland, warned competition was best left to the market to decide.

He told the BBC: "I feel very strongly that the number of competitors shouldn't be something that's designed in some Whitehall department."

"Whether big or small, let the market and consumers decide," he added.

The ICB - set up in June to look at financial stability and competition - said it believes that current European requirements for Lloyds and RBS to sell-off assets could "go further" to increase choice for consumers.

One option would be for the Government to use its stakes in the taxpayer-backed banks to improve competition.

"Beyond that, and most radically, is the option of requiring the UK's largest banks to divest assets with a view to creating a more competitive market structure," according to the report.

As part of its inquiry into separating investment and retail banking, the ICB said it would look at far-reaching reforms such as "narrow banking", where a bank would handle only utility services, such as transactions and deposit-taking.

Under this solution, all retail deposits would be 100% backed by Government bonds so that savings are safe, while the banks would also be immune from State bail out.

It will also consider limiting proprietary activities by retail deposit banks in areas such as hedge funds and private equity investments - an idea which has recently been introduced into US law.

However, its remit will also cover less radical moves for the banking industry.

It is to look at the possibility of allowing those with investment banking and retail operations to separate internally, or even only in times of crisis.

And on the issue of high street banking competition, it will look at a "less direct policy option" to simply reduce barriers to new entrants.

This could involve making it easier to switch current accounts.

The ICB will begin hearings with banking chiefs in private later this year, while it will also hold public meetings across the UK as part of the inquiry, which is due to complete by the end of next September

Sir John said he hoped banks would engage in "constructive" talks and sought to assure that the commission would be taking concerns over the competitiveness of the UK very seriously.

Angela Knight, chief executive of the British Bankers' Association, welcomed today's issues paper. "We look forward to a measured, rational and objective consideration of how we can work together to improve the banking industry in the UK."

However, she said: "We believe the UK industry has already taken significant steps to improve its financial position. Our retail banks - as independent research has shown - also already provide customers with more choice, greater protection and offer better value for money than in other countries."

As well as Sir John, the ICB is also made up of Clare Spottiswoode, the former director-general of Ofgas, Martin Taylor, a former chief executive of Barclays, Bill Winters, the former co-chief executive of JP Morgan, and Martin Wolf, the chief economics commentator at the Financial Times.