Politics of Banking:
Will ministers fire both barrels?

As the politicians launch two more high profile investigations into UK banking, the big question is how radical either will prove to be in the remedies they recommend. CHRIS BAUR measures the undercurrents.

Despite many signs to the contrary, not everyone’s convinced that we really are headed for a bloody showdown between the banks and the politicians. The rhetoric certainly says so, but the question remains: will it turn out to be so much grandstanding?

On the face of it, the drama is preordained. UK bankers are looking straight down both barrels of a wicked-looking political shotgun. The first is loaded with the year-long inquiry just launched by the Independent Commission on Banking (ICB), chaired by Sir John Vickers. The second is primed with the parallel six-month investigation by the powerful Commons Treasury Select Committee under Andrew Tyrie MP.

They overlap: both are centrally mandated to consider what’s needed to promote competition in banking services. But each will provide its own distinctive flashpoint. With the Vickers Commission, the greatest interest will focus on the practicality of the so-called “nuclear option” of separating retail and investment banking functions. For the Tyrie Committee, the hot issue is whether muscular new players really can be created from the wreckage of the financial crisis to challenge existing banks.

But, in reality, the language of confrontation is being choreographed with some delicacy. Partly, that’s because of differences within the governing coalition. Establishing the Vickers Commission, Chancellor George Osborne is clear about the need for what he calls a "new settlement" between the British people and the banks – but meticulous not to pre-empt conclusions on the trickiest issue, what to do about the “too big to fail” banks.

Osborne’s Liberal Democrat coalition colleague, the Business Secretary, Vince Cable, is less reticent in highlighting what to him is the obvious "direction of travel" towards separating retail and investment banking. He even suggests that the UK could act unilaterally if there was no global agreement.
The heart of the debate is whether and how to divide the “casino” investment banking functions from the narrow “utility” services. Bank of England

Governor, Mervyn King, has been persistent in arguing that “the massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The ‘too important to fail’ problem is too important
to ignore.”

With practiced balance, the Financial Times fields two seasoned commentators in opposing corners. Its Martin Wolf confesses that, while he admires Mervyn King’s determination to “make politicians uncomfortable”, he is personally “unpersuaded that the structural solution – the separation of utility from casino finance – is workable”.

His colleague, John Kay, however, is trenchantly convinced it is. “Sir John Vickers” he argues, “will hear a lot of tosh on the separation of banks... His Commission will be told that such a separation between utility and casino can’t be done – although it was done in Britain for most of the 20th century.”
What’s utterly clear is that banking’s big boys will fight. The battle flags are already being hoisted (see panel) and sighting-shots fired. And, if that’s not eloquent enough, the “leave us alone” champions will have an even stronger voice within government itself with the expected recruitment of HSBC Chairman, Stephen Green – arguably Britain’s biggest international banker and an opponent of break-up – as a trade minister in Vince Cable’s team.

Because it reports first, however, it’s Andrew Tyrie’s Select Committee that’s bound to hog the early limelight. And he’s wasted little time mapping the direction of his preferred line of attack. He wants two things – first, to explode the “myth of free banking” with far greater transparency about the true cost of banking services to customers; and second, to secure the break-up of the partially State-owned banks such as Lloyds Banking Group and Royal Bank of Scotland.

And it’s this second objective that sets the Select Committee on a potential collision course with the Government and with UK Financial Investments (UKFI), the organisation charged by Ministers with managing – and ultimately disposing of – the stakes with which taxpayers “rescued” the ailing banks.
 Tyrie himself acknowledges the inherent tension between his instinct to anatomise the State-backed giants, and the UKFI’s remit to get the highest price for the taxpayers when the Government’s holdings are sold in the next few years.

“There’s a risk of governmental conflict of interest here,” he agrees. “Governments have an interest in maximising the yield from these sales. They also have a duty to maximise competition in the retail market.” That’s precisely the dilemma. And, with today’s mounting and unprecedented pressures on public finances, it’s a moot point whether Ministers really will allow the laudable long-term goal of “more competition” to take precedence over the Treasury’s immediate hunger for “best sale price”.

Meanwhile, the established banks have an understandable vested interest in poor-mouthing any efforts to usher new players onto the banking stage. “I embrace competition and diversity,” says Stephen Hester, chief executive of Royal Bank of Scotland, adding with implacable finality: “However, we shouldn’t kid ourselves – I can’t think of a single country in the world where the number of banks is going up.”

Banks hoist their battle flags
Some of Britain’s biggest banks have been dropping none-too-subtle hints that they might consider quitting London, if they don’t like the reforms being planned by the politicians. “We've been looking at it more because we're asked about it more by our investors,” says Peter Sands, chief executive of Standard Chartered.

The Government’s levy on bank balance sheets, the new capital requirements and the possible break-up of retail and investment functions are all cited by Sands as reasons to question London as Standard Chartered’s headquarters city. “There’s no doubt the arguments for London have weakened relative to other centres,” he says.And HSBC’s head of investment banking, Stuart Gulliver – considered likely by many to be that bank’s next chief executive – has also weighed in with a similarly Delphic warning: “Our preference is to remain headquartered in the UK,” he declares. But the possibility of being forced to split retail, commercial and investment operations, he then adds, would have “significant implications, clearly, for where we may choose to headquarter our institution.”

Barclays has also made its position crystal clear with the appointment of Bob Diamond, the highly successful head of its investment arm, Barclays Capital, as the next chief executive to succeed John Varley next year. “As a leading global universal bank,” says Diamond with unmistakeable emphasis, “Barclays has the right model, the right strategy and above all the right people to deliver for all our stakeholders."

Back to Special Report content
Back to magazine content