11/04/2011 16:47
Lloyds Banking Group reacted angrily to a report on the future of UK banking that suggested it should increase the number of planned branch sales to increase competition in retail banking.
The Independent Commission on Banking, led by Sir John Vickers, on Monday outlined specific measures to weaken the state-backed bank’s dominant 30 per cent share of the market for current accounts, by selling “assets and liabilities” over and above the 600 branches it is already divesting under an agreement with the European Union known as Project Verde.
“Although Lloyds is required to divest a package of assets and liabilities to satisfy conditions for state aid approval set by the European Commission, this divestiture will have a limited effect on competition unless it is substantially enhanced,” the report said.
But the proposals – which herald the start of the biggest shake-up of the sector for a generation – were met with an angry response from Lloyds.
“We are surprised that the interim report is proposing a potential expansion of Project Verde which we believe is not in the interest of our customers. This option appears to be based on limited evidence and may paradoxically potentially delay a new competitor coming into the UK market,” said Antonio Horta-Osorio, chief executive of Lloyds.
Shares in Lloyds rose 0.6 per cent to 62.52p in afternoon London trading, lagging the rest of the sector.
The long-awaited report also recommended that banks ring-fence their UK retail operations to ensure that critical operations – such as customer deposits, small business lending and payment systems – can keep running in the event that the banking system fails.
Core tier one capital, the highest quality type, should be raised to 10 per cent from the current 7 per cent for the retail divisions, according to the report.
The recommendations follow a four-month consultation between the commission and the banking industry. The commission was asked to look at how to improve banks’ structure to ensure they can better withstand future crises, and how to increase competition in the highly concentrated retail banking market.
The commission acknowledged the cost of the structural remedies on the banks but suggested that the industry had exaggerated the impact and remained unconvinced that the reforms would not push big institutions such as Barclays and HSBC out of London.
The report ruled out a number of more drastic measures.
Crucially, banks will be able to move capital freely around the business as a whole rather than independently capitalising their retail and investment banking divisions. This is a looser approach to so-called subsidiarisation – the creation of separate subsidiaries for retail and investment banking – than the big universal banks had initially feared.
“As to the form that separation might take, a balance must be struck between the benefits to society of making banks safer and the costs that this necessarily entails,” it said.
Shares in Barclays and Royal Bank of Scotland, the two banks thought most vulnerable to a separation of investment and retail banking, rallied in London.
Andrew Gray, UK banking leader at consultants PwC, warned the recommendations could increase costs and reduce competition.
“There is far more capital in the banking system than during the financial crisis and requiring banks to hold even more could force mortgage, loan and credit costs to climb. Increasing capital requirements would also make it harder for new banks to break into the market,” he said.
But Peter Vicary-Smith, chief executive of consumer organisation Which?, welcomed the report as “a step in the right direction”.
“The financial crisis highlighted serious failings in our banking system and we need root to branch reforms to prevent it from happening again. We welcome the intention to ring-fence the retail banking services we rely on every day, but banks mustn’t be allowed wiggle room to avoid fundamental change,” he said.
The commission will now open another period of consultation with the industry to thrash out the details of the reforms, including which retail banking assets should be protected, before it makes final recommendations in September.
The report will fire the starting shot on a period of intense lobbying from the banks as they try to temper the final proposals.
The Independent Commission on Banking, led by Sir John Vickers, on Monday outlined specific measures to weaken the state-backed bank’s dominant 30 per cent share of the market for current accounts, by selling “assets and liabilities” over and above the 600 branches it is already divesting under an agreement with the European Union known as Project Verde.
“Although Lloyds is required to divest a package of assets and liabilities to satisfy conditions for state aid approval set by the European Commission, this divestiture will have a limited effect on competition unless it is substantially enhanced,” the report said.
But the proposals – which herald the start of the biggest shake-up of the sector for a generation – were met with an angry response from Lloyds.
“We are surprised that the interim report is proposing a potential expansion of Project Verde which we believe is not in the interest of our customers. This option appears to be based on limited evidence and may paradoxically potentially delay a new competitor coming into the UK market,” said Antonio Horta-Osorio, chief executive of Lloyds.
Shares in Lloyds rose 0.6 per cent to 62.52p in afternoon London trading, lagging the rest of the sector.
The long-awaited report also recommended that banks ring-fence their UK retail operations to ensure that critical operations – such as customer deposits, small business lending and payment systems – can keep running in the event that the banking system fails.
Core tier one capital, the highest quality type, should be raised to 10 per cent from the current 7 per cent for the retail divisions, according to the report.
The recommendations follow a four-month consultation between the commission and the banking industry. The commission was asked to look at how to improve banks’ structure to ensure they can better withstand future crises, and how to increase competition in the highly concentrated retail banking market.
The commission acknowledged the cost of the structural remedies on the banks but suggested that the industry had exaggerated the impact and remained unconvinced that the reforms would not push big institutions such as Barclays and HSBC out of London.
The report ruled out a number of more drastic measures.
Crucially, banks will be able to move capital freely around the business as a whole rather than independently capitalising their retail and investment banking divisions. This is a looser approach to so-called subsidiarisation – the creation of separate subsidiaries for retail and investment banking – than the big universal banks had initially feared.
“As to the form that separation might take, a balance must be struck between the benefits to society of making banks safer and the costs that this necessarily entails,” it said.
Shares in Barclays and Royal Bank of Scotland, the two banks thought most vulnerable to a separation of investment and retail banking, rallied in London.
Andrew Gray, UK banking leader at consultants PwC, warned the recommendations could increase costs and reduce competition.
“There is far more capital in the banking system than during the financial crisis and requiring banks to hold even more could force mortgage, loan and credit costs to climb. Increasing capital requirements would also make it harder for new banks to break into the market,” he said.
But Peter Vicary-Smith, chief executive of consumer organisation Which?, welcomed the report as “a step in the right direction”.
“The financial crisis highlighted serious failings in our banking system and we need root to branch reforms to prevent it from happening again. We welcome the intention to ring-fence the retail banking services we rely on every day, but banks mustn’t be allowed wiggle room to avoid fundamental change,” he said.
The commission will now open another period of consultation with the industry to thrash out the details of the reforms, including which retail banking assets should be protected, before it makes final recommendations in September.
The report will fire the starting shot on a period of intense lobbying from the banks as they try to temper the final proposals.
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