Sir John Vickers: Banks must ring-fence retail arms

It stopped short of saying the two activities should be split but called for more capital to be allocated to the retail businesses. And the commission, headed by Sir John Vickers, accused the banking industry of exaggerating how much this could cost.

Bank shares rose sharply on the stock market with Barclays and Royal Bank of Scotland leading the way as analysts said the commission had come up with a pragmatic and affordable plan.

Key recommendations by the five-man commission, which will produce its final report for the Chancellor in September, include:

* Raising the amount of equity UK retail banks must hold to at least 10% of their assets. Investment banks would only have to match international capital standards, currently 7%;

* Investment or wholesale banks must have "resolution plans" which allow them to fail without risk to the UK taxpayer;

* Putting the claims of ordinary savers above those of bondholders and shareholders;

* Banks would be able to move capital between operations provided they do not fall below the minimum capital ratio levels;

* Lloyds must sell "substantially" more than the 600 branches which it has been ordered to by the European Commission;

* Banks must move quickly to ensure switching current accounts is cheaper and more efficient. They must make charges clearer.

Vickers said: "We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ring-fence idea."

He said the proposals were a "moderate combination of the strategies rather than maxing out on total structural separation or indeed maxing out on super-high capital requirements".

But he also admitted Lloyds' takeover of HBOS at the height of the financial crisis had been a mistake: "This was certainly not good for competition and it turned out to be bad for financial stability as well."

The commission said it believed, based on the secret submissions made to it by individual banks, the cost of ring-fencing would be "much smaller" than the £12 billion-£15 billion which had been suggested by the industry. It said banks had ignored the fact that many will have to raise extra capital to meet other regulatory changes anyway, they had assumed no benefits from being allowed to keep universal banking and some had applied the costs across their global operations, not just the UK.

John Cridland, director general of the CBI, said: "The commission's proposals on ring-fencing could have a significant impact on the UK financial landscape, and will need to be carefully assessed to ensure that they allow banks to support businesses and growth."

But Keith Bowman of private client stockbrokers Hargreaves Lansdown warned bank customers could lose out, with higher banking charges to pay for rising financial capital cushions.

What happens next...

Today's interim report from the Independent Commission on Banking is just one step on the path to banking reform in this country.

Sir John Vickers's commission has given the banks and other interested parties until the end of July to comment on today's paper. The commission will then publish its final report in September.

It is then up to the Chancellor of the Exchequer George Osborne.

The Government set up the commission but is under no obligation to accept all or any of its recommendations.

That means banks still have some months to lobby for change even though most industry observers feel they have been let off quite lightly given the public furore over the bail-outs and bankers' pay. One area which will need to be tackled sooner rather than later is the increase in the number of branches Lloyds must sell.

Both the commission and Lloyds will want such a sale to be made as a single transaction - the former to create more competition, the latter to get the best price. If that is to happen Osborne will have to make his views clear quickly since Lloyds has to prove it has potential buyers lined up by this October.

All the banks are likely to challenge the speed at which they have to show that they have ring-fenced their retail business. The Big Four High Street banks at present meet the new capital ratio rules suggested by the comission although some, such as Barclays, might need to raise extra capital in the near future.

Good for the banks, bad for customers

David Fleming, Unite union:

"We have been presented with nothing more than merely tinkering at the edges. This is another missed opportunity to protect customers and staff from the corporate greed which brought disaster to our economy."

Bob Penn, Allen & Overy:

"The UK has no power to force a European bank to subsidiarise its UK banking operations. So this risks allowing the big European banks to step in to the UK markets at a competitive advantage."

Bruce Packard, Seymour Pierce:

"Although there will be a lot of squealing in public, we expect the bank managements to be secretly quite pleased...banks will still be allowed to transfer capital and liquidity from their UK retail banking activities to the markets and investment banking business."

John Smith, Brown Shipley:

"They've got away with it, apart from Lloyds which might have to sell off more assets, but it could have been harsher and it wasn't."

British Bankers' Association:

"Banks in the UK have already undergone significant change since the global crisis, including increasing capital and liquidity and estabilshing resolution plans, to protect despositors and to keep finance flowing."

Barclays leads rally as fears are calmed

Bank shares rallied as the City saw few terrors for the industry in the Independent Commission on Banking's interim report today.

Barclays rose 9.7p to 306.9p as the ICB stopped short of proposing a split between investment and retail banking operations as expected.

Royal Bank of Scotland's shares added 1.1p to 44.5p although the taxpayer, which owns 83% of the shares, is still £4.9 billion down on its £45.2 billion bailout. Lloyds Banking Group added 0.6p to 62.8p, close to the break-even point for the public purse and leaving the taxpayer £110 million out of pocket

'City to stay competitive'

Reforms to the banking industry should not harm the UK economy or mar the City of London's global competitiveness, today's report said.

The Independent Commission on Banking said that HSBC and Barclays need not quit the UK, despite threats to the contrary should the changes prove too draconian.

Part of the commission's brief was to look at how banking reform would affect Britain's competitiveness. It said its reforms should have a "broadly neutral effect the City", which will come as a relief to Lord Mayor Michael Bear. It added: "Improved financial stability should be good, not bad, for competitiveness. More resilient banks are central to maintaining London's position as a leading global financial centre, not a threat to it."

It added that during the 2008 financial crisis there had been a "flight to quality" as banks retrenched to the big four global financial centres including London.

The commission admitted that its reforms "would require some potentially costly adjustments and expose to increased regulation those banks directly affected, which may affect the attractiveness of the UK for some parts of those firms."