Shares in Britain’s biggest banks fell into the red amid warnings of major upheaval under a Government-commissioned inquiry into the sector.
Barclays, Royal Bank of Scotland and Lloyds Banking Group were under pressure after Sir John Vickers, chairman of the Independent Commission on Banking (ICB), confirmed in a weekend speech that moves to split retail and investment banking operations were being considered.
He also said big players should be forced to set aside even more capital for emergencies.
There was some relief from the industry that the worst case scenario of carving up “too big to fail” players appeared to be off the cards. But there was a mixed reaction from investors and experts amid concerns over the implications of potential plans to ring-fence high street deposit-taking operations from investment banking business – seen as being more risky.
Gareth Hunt, analyst at Investec Securities, said while Sir John’s message was better than some had feared, it “left the door open to subsidiarisation”. He added there was a risk the ICB may yet look at a full bank break-up under its remit to consider competition in the banking sector – a topic left aside in the speech.
Barclays and RBS would be the worst affected by so-called subsidiarisation, with the impact unclear on HSBC, according to Mr Hunt. RBS fell 4% and Barclays dropped more than 1%. Lloyds also fell 3% despite having no investment banking division and indications that it may be let off the hook, as the bank had been seen as the greatest at risk of a break-up.
Howard Wheeldon, senior strategist at BGC Partners, said: “Seeking to impose yet another round of severe restrictions in the form of splitting the activities of retail and investment banking is tantamount to cutting the legs of our banks off at the knees. Those that are more retail-orientated, such as Lloyds, would feel only minimal pain. But for the majority the idea of splitting retail from investment banking is abhorrent, mainly because the health of one is often dependent on the other.”
Bob Diamond, new chief executive at Barclays, told MPs earlier this month that subsidiarisation would not make the system safer and could in fact impact the bank’s ability to lend. Around 80% of Barclays profits are generated by its investment bank, Barclays Capital.
In a Treasury Select Committee, Mr Diamond said: “We have to focus much more on what the implications are in terms of funding. There would be a significant increase in the funding levels for a firm modelled such as Barclays, and that has implications in terms of the capacity for lending as well as the price of lending.”
He also stressed that Northern Rock failed despite being a pure retail bank, while Barings went bust in the 1990s regardless of its subsidiarised structure. It is thought that concerns over the impact of ICB recommendations on the ability of banks to lend is proving a major sticking point in so-called Project Merlin talks with the Government over lending targets.