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UPDATE 1-UK's Vickers sees case for form of bank separation

By Sudip Kar-Gupta LONDON, Jan 22 (Reuters) - Separating different banking activities and their various capital requirements could reduce the danger of banks failing, the head of a government-backed body probing possible reform of the sector said on Saturday. Britain set up the Independent Commission on Banking (ICB) last year to examine possible changes to the sector following the credit crisis, which saw top banks such as Royal Bank of Scotland and Lloyds needing bailouts. John Vickers, who heads the ICB body, told a business conference that the ICB was still examining the possibility of splitting banks' retail and investment banking businesses. "If the probability and/or impact of bank failure, particularly of retail service provision, can be reduced by forms of separation between banking activities, then so too might capital requirements," Vickers said. Normal bankruptcy procedures work so poorly for large banks that countries must find new ways of managing any failure causing without damage to the wider economy. "Credible resolution would seem to require at least some form of separability," he said. "Arguably there is a case for some form of ex-ante separation so that bank operations whose continuous provision is truly critical to the functioning of the economy can clearly be easily and rapidly carved out in the event of calamity." The failure of financial institutions to manage risks properly before the crisis had been "spectacular", he added. "The shock from the fall in property prices, even from their inflated levels of a few years ago, should not have caused havoc on anything like the scale experienced," he said. "Rather than suffering a 'perfect storm', we had severe weather that exposed a damagingly rickety structure." Vickers added that the ICB was unlikely to support banks with narrow business models, although it would still examine this issue. "While the ICB is unlikely to favour radical forms of narrow or limited purpose banking, their aims deserve recognition," he said. The commission is due to give its findings to the UK government in September. (Editing by Toby Chopra) Keywords: BRITAIN BANKS/ (sudip.kargupta@reuters.com; +44 207 542 9795; Reuters Messaging:sudip.kargupta.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2011. All rights reserved.

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