New year, new banks

The Vickers way - but is it best for business

The Vickers Report sets the stage for a revolution in UK banking. But will the report deliver a significant new deal for businesses? TOM JOWITT gauges reactions from both the business and banking communities.

September’s ground-breaking report of Sir John Vickers’ Independent Commission on Banking (ICB) foreshadows a huge shake-up in UK financial services – if its recommendations are fully implemented. The government has pledged to do just that. But it’s now clear that both the banking industry and the business community are seeing an awful lot of devils in the detail.

The key to Vickers is the Commission’s insistence that banks are forced to ring-fence their high street retail businesses, effectively quarantining them from the riskier investment banking arms. Banks will also be subject to a competition investigation in 2015.

For many banks, it’s this ring-fence that’s the biggest worry – not the erection of it necessarily, but certainly exactly where the fence-posts should be driven into the ground. And there’s an overriding concern that the big costs implied by implementing Vickers-in-full will damage banks’ ability to fund economic recovery.

This is also the business community’s sharpest concern. Lobbyists appreciate the long-term implication of greater competition being engineered among UK banks, but are terrified of the big new costs of banking services they see looming as bankers adjust to new heavy-duty regulatory regimes.

Business has long been vociferous in complaining about the restricted access to banking credit with loan terms and conditions that are ever harsher to adopt.

The Federation of Small Businesses (FSB) points to its recent research revealing that one-third of its members which had sought banking credit facilities were refused.

“Businesses are struggling to get credit and loans,” explains the FSB’s Andrew Cave. “Only 15 per cent of our members sought credit in the last year – a demand level that’s low for two reasons. One, it’s true, is that fewer businesses are investing right now. But the main reason is simply that they’re very nervous about approaching the banks because they expect to be faced with a demand for a complete review of all their existing facilities.

“Indeed 30 per cent of businesses believe they’re missing growth opportunities because of a lack of credit. And these are not risky businesses at all, but well-established operations.”

In real terms, he also argues, the proportion of banking credit available to British businesses is quite small: “Only 5 per cent of banking assets are committed to UK plc. All other lending goes internationally and into property. There needs to be a massive increase in the amount being lent to the business community to allow us to compete with rest of the world.”

The other issue for businesses is the perception of a banking sector whose structure lacks competitive bite – only five principal high street lenders for businesses, much lower than in other European countries, observes Cave.

That’s where he’d plant his first fence-posts: “We want to see more effective ring-fencing to ensure we don’t get huge sums of money transferred away from retail to the more riskier investment divisions.”

If there are positive pro-competitive benefits in the Vickers formula, business leaders can clearly see it’s going to be a long time for their real impact is felt. And meanwhile, there’s a more pressing recovery agenda.

So, while the Confederation of British Industry (CBI) cautiously welcomes much of the Vickers Way, it’s emphatic that what UK business really wants is greater stability in the banking sector – with an immediate imperative to focus on lending to support the economic growth.

But it does like a lot in Vickers’ direction of travel – its recommendation that banks be required to hold more capital to withstand losses; that they should have recovery plans to resolve crises; and that there should be more rigorous regulation to identify and tackle emerging problems.

Meanwhile, it urges the government to undertake a rigorous cost-benefit analysis of the ICB’s ringfencing proposals to ensure that the costs to the economy are fully understood, and that the benefits stand scrutiny, before moving ahead with implementation.

“The ICB proposals will add to the cost of banking operations in a number of ways, which will have a knock-on impact on the cost and availability of lending to business,” says the CBI. And it warns: “This is a substantial set of measures that go beyond the programme of reforms that’s been agreed internationally. Reforms that are unilateral and add to the cost of doing business should not be introduced at this point in the economic cycle.”

The Forum of Private Business (FPB) also welcomes Vickers, but warns it could take years for any significant changes to happen: “While there are other forms of credit out there for small businesses, we believe that providing better relationship banking is how to ease the punitive risk criteria we’ve seen in recent years, and subsequently bring down lending costs.”

As for the bankers themselves, it’s fair to say they’re still digesting the likely operational implications. Bob Diamond, the recently-installed CEO of Barclays whom many had identified as a root-and-branch opponent of the Vickers Way, recently surprised many by welcoming it as a step towards the greater clarity that banks need to be able to operate with confidence.

But there’s a caveat. “Of course, the hard work doesn’t stop here,” he adds.

The report calls for changes in UK law, changes in international law, and coordination with international regulation.

There are many steps yet to be taken and, until we know the full details, it’s difficult to quantify the precise impact.

“But we welcome the ICB’s recognition that the benefits of diversification in banking models should be retained, both for the good of clients and for the internal synergies that exist.”

He also welcomes the flexibility within the Vickers Way to determine the detail of implementation. “This allows for the definition of the ring-fence to be aligned with the shape of our retail, corporate and investment banking businesses and with the work we have underway on recovery and resolution plans.”

Meanwhile, Santander UK’s new chief, Ana Botin, has added her voice to the sector’s stern warnings that the ring-fencing of retail banks would deny small and medium-sized UK businesses access to the risk management and hedging services they need to grow their exports.

The critical question, she says, is precisely where the line of the fence should lie. “It should not be drawn in a way that prevents retail commercial banks from providing personal and business customers with standard banking services, including some hedging activities”.

She says that penalising retail banks with capital surcharges will restrict their lending ability, create additional costs for business and hamper growth. Core capital requirements should consider “the true risk profile of each bank”. Capital requirements should be aligned with Basel 3 proposals to avoid an unlevel playing field. “You don’t make the economy stronger,” argues Botin, “by making the banks weaker.”

TOM JOWITT is a journalist.

£40bn + £30bn: Osborne’s boost

As Chartered Banker goes to press, Chancellor George Osborne is set to announce details of two big budgetary boosts to get Britain’s economy moving.

A credit-easing scheme would release up to £40bn in loans to small and mediumsized firms (SMEs). And a decade-long £30bn National Infrastructure Plan would benefit some 40 big airport, rail, motorway, road, urban metro, underground and bridge projects.

SME boost: the government would underwrite banks’ borrowing to facilitate loans to firms turning over less than £50m. The plan would release lending of £20bn initially, rising to double that.

Infrastructure: The Treasury hopes to “unlock” two-thirds of its earmarked £30bn from big British pension funds, as well as Chinese investment, with some £5bn to be paid for by further spending cuts.

About £5bn will be provided in the next two to three years, and a further £25bn allocated in the long-term, according to Treasury Chief Secretary, Danny Alexander MP.

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