Q+A: The British banking shake-up: what’s it about?

LONDON (Reuters) – Britain’s top banks should shield their retail operations from riskier investment banking activities and hold more capital to protect taxpayers from any future financial crisis, a government-commissioned report said.

The recommendations in a 208-page report by Britain’s Independent Commission on Banking (ICB) also signaled Lloyds may have to sell hundreds more branches and other proposals to shake up the banking landscape.

Here are the key issues:


The ICB, headed by Oxford academic and former Bank of England interest rate setter John Vickers, is tasked with considering structural reforms to reduce risk and promote competition.

It is assessing whether Britain’s banks have become too powerful and their balance sheets too big for the British economy, and whether consumers get a fair deal from high street lenders, especially after the crisis weakened some smaller banks and saw Lloyds Banking Group swallow up HBOS.


The interim report marks the half-way point for the year-long probe. The final report is due out in September, so the interim version may be harsher than the final outcome.

It will be up to the government — through a Cabinet Committee on Banking chaired by finance minister George Osborne — to choose what to implement into law, probably starting late this year or early in 2012.


The ICB has suggested ways in which banks could protect their retail networks from other businesses. These include their investment banking operations, from which retail networks could be shielded by holding their own capital.

That would partly remove the risk of banks needing taxpayer help if the riskier investment arms run into trouble, as these could be allowed to fail without damaging depositors.

The report also examined ways to make banks’ lenders and bondholders bear the brunt of a bank’s losses before a taxpayer bailout is needed — ideally avoiding one altogether.

The panel added that Britain’s banks should hold a core Tier 1 measure of capital strength of 10 percent. New international rules place this at 7 percent although the world’s biggest banks, which pose a systemic risk, are expected to have to hold an extra 3 percent of core capital on top of that, however.


The report targeted Lloyds as one of the biggest offenders, because its merger with rival HBOS at the height of the financial crisis has left it with 30 percent of the current account market, more than any other bank.

The report suggested the bank may have to sell off more branches to dilute its grip on the market and to give more space for competition.

The panel also proposed remedies such as making it easier to switch between current account providers.

It suggested tackling tough entry barriers into the market for smaller banks by helping these get access to branch networks for cash-handling services, for example.


Lloyds would be hardest hit by a clampdown on competition. It is already selling 600 branches, but it is likely to have to sell more after the ICB dubbed its move “insufficient.”

Morgan Stanley estimates the sale of 1,000 branches would wipe 17 percent off earnings, while Deutsche Bank analysts reckon a 50 percent increase in the size of the disposal unit would reduce earnings by 6 percent.

Sorting out the fine detail of the recommendations could also potentially delay the government’s sale of its 83 percent and 41 percent holdings in Royal Bank of Scotland and Lloyds, respectively.

Barclays is most at risk from structural change, analysts and investors say, as it is most reliant on investment banking. BarCap has earned over 7 billion pounds in the last two years, contributing two-thirds of group earnings.

The cost of holding separate capital, liquidity and funding would also hit HSBC and Standard Chartered hard, with the total cost running to several billion pounds, analysts said.


Possibly. Barclays, HSBC and Standard Chartered have all said onerous regulations could see them leave London.

Holding billions of pounds more capital than overseas rivals and seeing profits cut could see them follow through with threats to quit London for New York, Shanghai or Hong Hong. Toronto, Paris and Singapore have also been mooted.


ICB members have been locked into a tussle with policians over the influence and independence of their report, heightened by the government brokering its own deal with the banks over pay and lending in February.

Fears that this agreement, dubbed Project Merlin, would hamper the ICB’s own plans were partly allayed by reassurances from British Chancellor of the Exchequer George Osborne over the committee’s role.

But it will ultimately be up to politicians to implement or shelve the proposals, and banks are already lobbying hard to limit the scale of reform.

The government’s stake in RBS and Lloyds could also be hit by harsh proposals.

It could spark a political row, as Liberal Democrat members of Britain’s coalition government want a more radical shake-up of the banking system than their Conservative partners.


Vickers is an Oxford academic well versed in finance and the City, after chairing UK consumer watchdog the Office of Fair Trading and serving as a member of the Bank of England’s interest rate-setting Monetary Policy Committee.

Alongside him on the five-person panel are Bill Winters, former head of investment banking at JPMorgan; Martin Taylor, CEO of Barclays from 1994 to 1998; Clare Spottiswoode, who oversaw the break-up of Britain’s gas industry; and Martin Wolf, a Financial Times journalist.

(Reporting by Steve Slater and Sarah White; editing by Sophie Walker)

Q+A: The British banking shake-up: what’s it about?