The British government commission that convenes tomorrow is unlikely to propose breaking up the country’s biggest banks after three of the five biggest lenders threatened to leave the country rather than accept change.
John Vickers, the former Bank of England economist asked by the coalition government to decide whether lenders should separate their consumer and investment banking divisions, will tomorrow start collecting evidence. He will deliver his final report to Chancellor of the Exchequer George Osborne and Business Secretary Vince Cable next September.
“The U.K. has always been timid in acting unilaterally,” said Mark Wickham-Jones, a professor of politics at the University of Bristol. The commission will “be fairly modest in its ability to come up with anything radical” because of banks’ threats to leave the U.K., he said.
HSBC Holdings Plc, Barclays Plc and Standard Chartered Plc have said they may move their headquarters overseas if the U.K. demands separation. The Independent Commission on Banking’s terms of reference require it to consider the effect of their proposals on the U.K.’s “competitiveness” and on the government’s tax income, which would be cut by bank relocations.
Speaking before the election in May, Prime Minister David Cameron said he would avoid drawing “false dividing lines,” between retail and investment banking. Since taking office, George Osborne has only reiterated the government’s interest in barring proprietary trading by universal banks, similar to the rule proposed by former Federal Reserve Chairman Paul Volcker.
“The commission is not going to come out and say universal banks should be broken up,” said Mike Trippitt, an analyst at Oriel Securities Ltd. in London who has tracked the banking industry for 17 years. Instead, the final report will probably propose limits on proprietary trading and require banks to bolster their capital and liquidity, he said.
Cable’s Liberal Democrats, the smaller of Britain’s two governing parties, had favored stronger action. Three months before the May election, Cable said he was “committed to splitting up” banks including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, where the government has controlling stakes. On Sept. 8, he said banks could be split using “more subtle” measures.
“It is totally unnecessary to have this commission, it has brought additional uncertainty to the U.K. banking market,” former Labour Treasury Minister Paul Myners told the BBC on Sept. 18. “Vickers should say you have given me a year, I don’t need a year. I can complete this work in four months.”
The five-member commission, run by Vickers, a professor of economics at Oxford University, appears to be balanced between proponents and opponents of splitting universal banks.
Clare Spottiswoode, former director general of energy regulator Ofgas, also sat on the Future of Banking Commission sponsored by Which?, a consumer lobby group that concluded in March that a “compulsory separation of banking activities has the potential to solve many current and persistent problems.”
Martin Taylor, the former Barclays CEO who sold Barclays de Zoete Wedd’s money-losing European equities and corporate finance units, indicated at a Future of Banking Commission hearing on March 15 that he favored splitting up banks. The Glass-Steagall Act, which separated commercial and investment banking in the U.S. from 1933 until its repeal in 1999, is “quite attractive,” he said.
Bill Winters, co-CEO of JPMorgan Chase & Co.’s investment bank from 2004 to 2009, argued that separating wholesale and retail banking would be “very costly to the economy” at a debate in London in September 2009.
Martin Wolf, the final commission member and chief economics commentator at the Financial Times, has questioned the adoption of so-called narrow banking, where credit creation and deposit-taking are separated.
“The disadvantage is that the entire credit system would be outside the banking system,” according to the text of a speech he delivered in Seoul this month. “It is highly likely that the government would still respond to a collapse, as the U.S. government responded to the collapse of its so-called ‘shadow banking system.’”
Facing increasing regulation, British banks are threatening to relocate abroad. Barclays CEO John Varley said Sept. 7 that the bank would consider moving if the commission called for a split, while Standard Chartered CEO Peter Sands said in August it may move its headquarters out of the U.K. if the government imposes new taxes on lenders. HSBC may also go if the commission suggests a split, said Stuart Gulliver, the bank’s investment banking head, on Sept. 2.
The commission will gather written evidence from the banks and others until November, then publish a range of options in the first half of next year, according to a person familiar with the plans, who asked not to be identified because the details are private. Its initial inquiry may look at the introduction of so-called living wills, forcing banks to plan for their demise in the event of a crisis, the person said.
The commission will also seek to boost competition to benefit consumers and businesses, according to the Treasury. The U.K.’s five largest lenders control about 70 percent of the country’s mortgage market, showing the lack of competition in the banking sector, the House of Commons Treasury Committee said in a report this year. Lloyds holds about 30 percent of British mortgages, according to the Council of Mortgage Lenders.
Expectations that the banking industry will get what it wants from the commission are mistaken, said John Thurso, a Liberal Democrat member of the Treasury Committee.
‘Grasped the Mood’
“Bankers who say ‘We survived, we can take the tin hat off and go back to business as usual,’ haven’t grasped the mood,” said Thurso. “People in the City are not always very good at reading politics. They would be wise to take it more seriously.”
Any decision to break up universal banks would put Britain out of step with other countries including the U.S., France and Germany, HSBC’s Gulliver said at a financial services conference in London on Sept. 2 organized by Nomura Holdings Inc.
The Association for Financial Markets in Europe, a lobby group for about 200 financial firms, said in a report yesterday that proposals to break up Europe’s biggest multinational banks would be “unworkable” and risked undermining financial stability.
The majority of the commission’s recommendations are likely to be too technical to placate public anger towards bankers once government plans to cut departmental spending by as much as 25 percent are announced on Oct. 20, said Tim Bale, senior lecturer in politics at the University of Sussex.
After that, “people are going to be saying ‘What have you done to the bankers?’” said Bale.