UK to favour ring-fencing at banks, not break-ups

A probe into British banks will recommend ring-fencing retail and trading divisions rather than full break ups, striking a balance between protecting savers and not undermining the City of London, a Reuters poll showed, according to Reuters.The Independent Commission on Banking (ICB), set up in the wake of the financial crisis, may not rule out splitting them up when it publishes its interim report on April 11, however, preferring to hang on to a powerful bargaining chip.
All eleven analysts and fund managers who contributed to the poll expect the commission to favour the creation of separate subsidiaries for retail and more risky investment banking in a move that will likely require more big increases in capital but leave the banks intact as institutions.
'I think they'll go for ring-fencing, that's the easy option,' said Brown Shipley fund manager John Smith.
None expected it would ultimately a recommend a full split although one investor said the ICB may keep this options open for a while yet.
'Formally ruling out a full break-up now would remove some of their negotiating power,' said Royal London Asset Management fund manager Jane Coffey.
The April 11 interim report precedes a final report in September, but the interim report should give key clues as to its eventual conclusions and thinking on how Britain's banking system can be reformed to improve competition and resilience.
Its findings will be one of the most keenly awaited events for UK banks this year, with Britain unlikely to sell any of its Royal Bank of Scotland and Lloyds shares until the final report is out.
Although the industry will be relieved if the ICB steers clear of a full break-up between retail and investment banking, the subsidiarisation approach will nevertheless put onerous capital requirements on the British banks.
Management consultancy firm Oliver Wyman earlier this month put the cost at up to 15 billion pounds ($24 billion) a year.
TOUGH ... BUT NOT TOO TOUGH
WestLB analyst Neil Smith said the ICB would want to be in line with other regulators around the world, such as the Basel banking supervisors who want banks to raise their Tier 1 capital and Britain's Financial Services Authority (FSA) whose head has said banks should triple their core capital.
In January, ICB head John Vickers said 'forms of separation' for big banks was an option worth considering.
The idea behind this is to ensure that retail customers are protected in case a company's investment banking business fails.
'The central case is there will be some recommendation about ring-fencing retail deposits. The primary motivation here is to protect the British taxpayer,' said Investec analyst Gareth Hunt.
Under the subsidiarisation model, banks have to allocate capital to units or country operations, as Spanish bank Santander does with its British arm. The units are legally ring-fenced but remain under the parent's ownership.
The ICB is also unlikely to seek a full split between retail and investment banks since 'universal banks', proved stronger during the crisis than 'narrow lenders' such as Lehman Brothers and Northern Rock who specialised on one line of business.
'They seem to be going down the route of ensuring there's enough capital ... to ensure they can handle any knocks in the investment bank,' said Oriel Securities analyst Mike Trippitt.
Britain's banking industry is dominated by the 'Big Four' of Lloyds, RBS, Barclays and HSBC, who have all resisted calls for a radical restructuring of their businesses.
While the government is keen for tough action on banks given persistent public anger, it would not want to damage Britain's role at the helm of global finance, which could cause top global banks to move headquarters away from the UK.
Cavendish Asset Management fund manager Paul Mumford said the subsidiarisation approach would let the ICB strike a compromise between showing the public that the banks have to change, while not harming London as an investment banking hub.
'I think subsidiarisation makes sense, but it may be that they'll come out with a wishy-washy compromise.'