Sunday, September 26, 2010

U.K. Commission Considers Bank Breakups

LONDON—The U.K. government's Independent Commission on Banking said it will consider recommending breaking up banks, imposing higher capital requirements and taxes for larger ones, and potentially forcing some to sell assets to make the sector more competitive.

In a paper laying out its goals, the commission said Friday that although it is still at the early stages of its investigation, its primary goal will be to find ways to provide stability and competitiveness to the hard-hit U.K. banking sector.

It has asked for feedback from the industry on the issues by mid-November. The commission will then narrow reform options by spring. It is expected to make recommendations to the government by September.

The commission was set up in June following the near-collapse of the banking system during the financial crisis and is headed by former Bank of England Monetary Policy Committee member John Vickers.

Among the reform options being considered, separating banks' retail and investment-banking operations is among the most controversial, and has led bank executives to lobby against the idea, saying the problem lies in regulation, not size.

In a statement, the British Bankers' Association welcomed the commission's work, but added that the sector had "already taken significant steps to improve its financial position."

"We believe that when you look at the issues the commission identifies, and place them against the experience of the crisis, then we have the potential for constructive solutions that take us where we ought to be," BBA Chief Executive Angela Knight said.

Stephen Hester, the CEO of Royal Bank of Scotland Group PLC, said: "We welcome the thoughtful and thorough approach signalled today by the banking commission. We see competitive markets as a good thing and, as shown in our own radical restructuring and recovery efforts, embrace the need for banks to operate more safely than before the crisis."

In the paper, the commission said a breakup could be an internal one, under which a holding company would have two separate units focused on retail and investment banking. It also said it will consider forcing banks to back 100% of retail deposits with "safe, liquid assets, of which government bonds of short-to-medium maturity are the prime example."

The commission's considerations come as at least two U.K. banks are poised to put their investment-banking heads in chief-executive posts, which could increase the pressure against such reform.

Barclays PLC recently announced Barclays Capital's Robert Diamond Jr. will become its CEO when John Varley retires next year. HSBC Holdings PLC on Friday confirmed that investment-banking head Stuart Gulliver will replace Michael Geoghegan as CEO, who is stepping down at the end of this year after being passed over for the chairman's job.

Analysts and industry insiders, however, have said radical ideas such as breakups aren't likely to be imposed by the government, which will have to tread a fine line between promoting stability in the sector and not scaring banks out of the country.

Some banks, including Barclays and Standard Chartered PLC, already have threatened to move their headquarters from London if harsh changes are imposed. Asia-focused HSBC, whose CEO already is Hong Kong-based, could also decide to relocate.

The commission said it will look into competition issues in the sector, which has shrunk amid a wave of consolidation triggered by the financial crisis. The U.K. has about 340 banks, compared with 390 in France and 2,000 in Germany. The U.K.'s six largest banks account for 88% of retail deposits, the commission said.

The top two spots are held by partly state-owned Lloyds Banking Group PLC and Royal Bank of Scotland Group PLC, which could be forced to sell assets if the commission imposes some of the options it is weighing. "A related option would be to impose a limit on the size of a bank's overall operations, by limiting the maximum size of a bank's balance sheet to no more than a certain percentage of gross domestic product," the paper added.

The commission said it will consider imposing higher taxes and capital requirements to larger institutions that pose a higher systemic risk. Foreign operations at U.K. banks could also be affected by the group's recommendations, it added.

No comments:

Post a Comment