Banks break-up ‘being considered’

Some banks have threatened to move abroad if they are broken up

The head of the commission reviewing whether the UK’s biggest banks should be broken up is expected to say later that wide-ranging reform is needed.

In a speech in London, Sir John Vickers is set to confirm he is considering plans to separate banks’ trading and retail operations.

These may require banks to put their investment arms into separate entities that could be allowed to collapse.

This would limit the risks to the wider financial system.

But Sir John will stress that no final decisions have yet been made.

Sir John, a former chief economist at the Bank of England, is the chairman of the five-person Independent Commission on Banking (ICB) set up by the coalition government.

It is looking at financial stability and competition, including the question of what should be done about banks deemed “too big to fail”.

One suggestion is that investment banks should be separated from retail banks, so that depositors’ money is not put at risk by the investment banking arms of the business.

Equally, if banks were allowed to collapse if mismanaged, taxpayers would not need to come to the rescue.

This is what happened when the last Labour government bailed out both Royal Bank of Scotland and Lloyds Banking Group when it deemed the risks to the wider financial system of allowing them to collapse were too great.

The commission is also looking at whether too few big banks have too much control over the retail banking sector in the UK.

Currently, the top six British banks control about 90% of all deposits. This compares with a 68% market share for Germany’s top seven banks and just 35% for America’s top eight.

Other topics for scrutiny include whether banks should be restricted in the amount of their own money they can use for investment trading.

Critics have said that splitting up banks could damage the UK’s competitive edge and make banks leave the UK.

HSBC has warned it would consider moving its headquarters from the UK if the commission recommended a break-up, while Standard Chartered has also questioned the future of its UK headquarters.

The other members of the ICB are Clare Spottiswoode, the former director-general of Ofgas; Martin Taylor, a former chief executive of Barclays; Bill Winters, the former co-chief executive of JP Morgan, and Martin Wolf, the chief economics commentator at the Financial Times.

The ICB has until September 2011 to make its recommendations to the government.

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