Sir John Vickers’ Independent Commission on Banking is to recommend the creation of separately capitalized UK retail banking operations, ringfenced within big bank holding companies, according to three people familiar with the process.
“The attractions of ringfencing [retail businesses] are multiple,” said one. “The business we have to keep going at all costs is customer deposits, payments systems, SME lending. There’s a public interest in preserving that.”
The recommendation, due to be made in the Commission’s interim report on April 11, is likely to be met with relief by bank investors, who had feared a more disruptive and costly set of conclusions.
Ringfencing would cost Britain’s big banks an aggregate £4 billion-£5 billion, according to estimates compiled by people involved in the process of liaising between the Commission and the banks. That figure compares with a £15 billion estimate in an Oliver Wyman report, ordered by the banks.
The Commission, created by the Conservative-Liberal Democrat coalition in the wake of the financial crisis, has two main aims: to make the banks safer and make the market more competitive.
The safety agenda — central to the government’s determination to avoid future taxpayer bail-outs — could have dramatic implications for big banks, particularly HSBC , Barclays , Royal Bank of Scotland and Standard Chartered .
Analysts say the lack of clarity until now about the Commission’s likely recommendations has been the single biggest factor holding back UK bank share prices, which have underperformed international rivals.
“Uncertainty surrounding the outcome of the ICB is preventing UK banks from defining strategic plans, which in turn restricts investor interest in the shares,” says Simon Maughan at MF Global.
Several banks, notably Barclays, have stepped up behind-the-scenes lobbying in recent weeks, suggesting that a costly enforced restructuring of their businesses could trigger plans to relocate abroad.
The interim report will indicate the Commission’s clear preference for how the banks should be restructured, leaving only technicalities to be worked through by September.
It will build on a speech by Sir John in January in which he suggested that “subsidarizing”, or ringfencing, the different operations of a “universal bank” could be an effective way to make it safer.
Bankers say there are essentially three possible forms of subsidiarization — geographic (a structure already employed by HSBC); functional, involving the creation of separate subsidiaries for distinct business activities such as high-street banking and investment banking; and operational, a structure that would involve pooling all a bank’s “plumbing” — IT, payment systems and so on, into one unit that could remain standing even if the bank’s core business was blowing up.
Those close to the five-member Commission — former gas regulator Clare Spottiswoode, former Barclays chief executive Martin Taylor, FT columnist Martin Wolf and former JPMorgan banker Bill Winters, as well as Sir John — say a combination of “functional” and “operational” subsidiarization will be a favored solution.
Under the plan, UK retail deposits and SME lending would be isolated in a “moated” business, whose drawbridge could be raised in times of crisis, bankers say.
“They came back to us several times to talk in more detail about how this might work,” said one banker involved in liaising with the Commission.
Bankers say this option would require separate capitalization of the retail operation, estimated by one bank at about £1 billion.
It would also have to be set up, with staff, property leases and technology carved out at an estimated cost of several hundred million pounds. But it remains unclear how much inter-group business, such as funding arrangements between a retail business and an investment bank, would be allowed.