Vickers Report ‘Spikes Guns’ of Banks Threatening to Quit London

Independent Commission on Banking Chairman John Vickers
Independent Commission on Banking Chairman John Vickers. Photographer: Simon Dawson/Bloomberg

Independent Commission on Banking Chairman John Vickers may have neutralized threats by lenders including Barclays Plc and HSBC Holdings Plc to quit London.

Commission Chairman John Vickers yesterday recommended the U.K.’s biggest banks erect fire breaks around their consumer units in what he termed a “moderate” report. He shied away from forcing banks to separate their investment and commercial banking operations completely.

“This does spike the guns of the big banks who have said they might be off because the U.K.’s regulatory environment is so horrific,” said Bob Penn, financial regulation partner at law firm Allen & Overy LLP in London. The ICB “decided that the reform agenda should be primarily limited to saving retail banking rather than the wider industry. Selfishly speaking, that is good for London as a financial center.”

British banks threatened to relocate abroad in the face of increased regulation. John Varley, Barclays’s then chief executive officer, said in September that the bank would consider moving if Vickers called for the full separation of investment banking and retail banking, as did Stuart Gulliver, now CEO of HSBC. Standard Chartered Plc CEO Peter Sands said in August it may move its headquarters out of the U.K. if the government raised taxes.

“One needs to cast a very skeptical eye on remarks of that kind,” Vickers said at a press conference in London yesterday. “There will be a whole host of practical obstacles, legal obstacles, and I think quite important are reputational obstacles.”

‘Jurisdiction Hop’

Customers would be likely to remove their deposits from banks seeking to “do a jurisdiction hop” because the banks would lose the U.K. government guarantee on their deposits, Vickers told reporters.

“They might well think if the U.K. government isn’t guaranteeing my deposits any more, they might not feel anything like as happy keeping my business with that bank,” he said.

HSBC spokesman Paul Harris referred to a March 6 statement in which Gulliver and Chairman Douglas Flint said “it is our preference to remain” based in London. Giles Croot, a spokesman for Barclays declined to comment. Standard Chartered spokesman Jon Tracey wasn’t immediately available to comment.

“The banks will be breathing a sigh of relief,” said Paul Mumford, a fund manager at Cavendish Asset Management in London. “Vickers and his colleagues have heeded bankers’ warnings and have shied away from recommending a total split of retail and investment banking operations, the outcome banks feared most.”

Shares Climb

Royal Bank of Scotland Group Plc, the biggest government-controlled lender, and Barclays, Britain’s third-biggest lender, rose in London trading. Barclays climbed rose 2.8 percent to 305.4 pence while RBS advanced 2.3 percent to 44.4 pence. HSBC, Europe’s biggest bank, declined 0.7 percent to 660 pence.

Lloyds Banking Group Plc, Britain’s biggest provider of checking accounts, advanced 0.3 pence to 62.4 pence. The commission said the London-based should divest “substantially” more branches than the 600 already being offered for sale to meet European state aid rules.

Vickers recommended the U.K.’s biggest banks boost capital, implement plans for an orderly bankruptcy and separately capitalize consumer units.

The largest banks should have a core Tier 1 capital ratio, a measure of financial strength, of at least of 10 percent, the commission said. Barclays and HSBC’s ratios are already estimated to reach 9.9 percent and 10.5 percent respectively in 2012, according to Christopher Wheeler, a banking analyst at Mediobanca SpA in London.

Swiss Finish

The Basel Committee on Banking Supervision said last year all banks had to maintain a 7 percent Core Tier 1 capital ratio. Lenders that are too-big-to-fail may be required to maintain 10 percent, people familiar with the talks said last month.

UBS AG and Credit Suisse Group AG, Switzerland’s two biggest banks, were told by regulators in October they may need to hold almost twice the amount of capital required by Basel. Bank of England policy maker David Miles said in January the biggest U.K. banks could hold twice the amount of capital the Basel rules require without increasing their funding costs.

Vickers recommended banks put their consumer operations into a separately-capitalized subsidiary within the holding company to protect depositors and enhance stability.

Such a structure would be “less costly” for banks than full separation, the report said. In the event of a bank collapse the “vital” consumer banking operations could be kept running while the investment banking activities are able to fail safely, the report said. The annual cost of ring fencing U.K. retail lending units will be “significantly” less than the 12 billion-pound ($20 billion) to 15 billion-pound estimate already in the public domain, the commission said.

Relocation Fears Receding

Lenders’ investment banking operations will still benefit from a lower cost of funding they derive from taking customer deposits because they will be in the same holding company, Wheeler said.

“The devil is in the detail and there will be a cost, but it will be seen as manageable,” Wheeler said. “Fears of banks relocating will recede.”

Bank chiefs started to tone down threats to leave London after Vickers said in a Jan. 22 speech that he wouldn’t recommend splitting up banks’ consumer and investment units.

“London is where we want to be,” Barclays CEO Robert Diamond said on March 30. HSBC’s Flint has enumerated London’s advantages over rivals. Mike Rees, Standard Chartered’s head of corporate banking, in January praised the British capital’s “great neutrality.”

Better than Feared

Vickers, 52, a former Bank of England chief economist, was asked by the government last year to devise proposals to boost stability and competition in the British banking industry after the taxpayer spent 65.8 billion pounds rescuing RBS and Lloyds during the financial crisis. The publication begins five months of lobbying before the final report is handed to Chancellor of the Exchequer George Osborne and Business Secretary Vince Cable in September.

“On its own, it was better than we feared,” said Gareth Hunt, a banking analyst at Investec Securities in London. “But we have to remember it comes on top of the bank levy, compensation rules, and the mortgage market review. In that light, it’s another brick in the wall. It all adds up.”

Vickers said that the proposals would be good for the City of London.

“Especially for a country which is so engaged in international finance, safeguards for retail banking, on which we all rely in everyday life, are common sense,” Vickers said. The report “should make the City no less attractive as a global financial center.”

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