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The bosses of Britain’s four biggest banks are being hauled before the Treasury select committee to discuss the independent banking commission’s proposals. Follow the action blow-by-blow with Jill Treanor • RBS boss Hester admits the government’s implicit bank guarantee could have fed through to bonuses 3.51pm: Stewart Hosie is asking questions now. Straight into capital ratios and return on equity for banks, which has become more of a problem since banks have been required to hold more capital since the financial crisis. Flint says banks are now holding three or four times what they used to. On a 10% equity tier one ratio, HSBC can make a return on equity of 15% – compared with 9% in 2010 when the bank did not make enough money to cover its cost of capital. HSBC spent an entire day last month spelling out how it intends to do this. Flint says a 10% capital ratio will become a “minimum figure”. [RBS's had eroded to 2%-ish after buying ABN Amro just as the credit crunch was beginning]. Flint is now listing all the changes the industry has made since the crisis – saying he wants a minute. He’s taking longer and Tyrie is now telling him to get a move on. Flint’s point is that the questions about reform should more than just about capital. Hosie is asking what is a safe ratio for banks. “If we go much beyond 10%… I think we risk costs to the economy… because it will be just about impossible to beat our costs of equity,” Flint says. He explains HSBC’s capital base is is £140bn so each time regulators hike capital requirements it takes “hundred of billions of capacity out of lending”. 3.41pm: Labour’s John Mann now. Not sure what’s he asked exactly, but Hester is saying that “everyone agrees there should be change”. Mann is quoting Flint, saying banking should be “predictable”. How can the taxpayer avoid picking up the cost of an investment bank? Flint says “you can never say never”, but that the chances have reduced. Mann is asking about the lack of competition in investment banking, with them all jumping into fund that takeover of Cadbury or float Glencore. Vickers does not really tackle this, says Mann, although Flint insists that he can’t agree that there isn’t competition in investment banking – or that it does not create value for the economy. Mann says the constant turnover of buyouts just creates fees for lawyers and investment banks. He is now turning on Tyrie, who is asking him to move on. “You don’t like my questions, chairman,” says Mann. Flint says investment banks won’t be bailed out going forward. “I agree,” says Hester. 3.32pm: Fallon is now asking what the difference is between the Vickers and HSBC proposals. Flint is making the point that Vickers hadn’t spelt out how ring-fencing would work. The HSBC version contains “certain inefficiencies” as new employment contracts might be needed and there would be a more complex administrative structure if banks were ring-fenced. 3.29pm: Flint is explaining that systemic risk doesn’t just come from retail deposits and argues that a broader ring-fenced bank is needed than the one proposed by the Vickers commission. The MPs and Flint have an advantage to anyone watching the hearing as they have the three-page HSBC submission that contains this HSBC version of ring-fencing. Fallon is describing it as “a ring-fence with holes in it”. 3.27pm: Hester is being asked what the cost would be for RBS if ring-fencing happened. Hester doesn’t answer directly, but says he can’t give a single number. Tyrie is asking if RBS can publish the numbers that RBS is working on. Hester warns they are “price sensitive”. Conservative MP Michael Fallon now. 3.25pm: Now she’s asking Flint if RBS should be broken up and more of Lloyds sold off. (The Vickers banking commission has suggested that Lloyds should sell more than the 600 branches the EU has ordered it to as a consequence of receiving state aid.) He essentially says no. “I don’t think for the consumer it would make much of a difference,” said Flint. First Labour MP now – George Mudie. Does ring-fencing prevent money moving from retail to the investment side of the bank? “The ring-fenced bank has to be broad in its scope…,” says Flint. “If you go down a ring-fencing route, you have to go with what is the best model to preserve the aggregate quantum of credit [to the economy],” he adds. It’s not entirely clear that he’s answered Mudie’s question, however. 3.22pm: Leadsom is asking Hester if it would be good idea to break up RBS. He says systemic risk is not about institutions but about how risk concentration is spread – citing the savings and loan crisis in the US, where lots of institutions all faced the same problems. Spanish cajas are in the same situation – none of them are big, but they are largely concentrated on the same risks, he says. “Really [it's] a red herring to look at the size of one institution to look at risk in the system,” he says. On deposits, Hester says that because people are encouraged to think there is government support, it means consumers and small businesses can put their deposits in an Iceland bank and know their money is safe. 3.15pm: Andrea Leadsom, another Conservative and one-time banker, is asking the questions now. She is talking to Flint, and asking him whether a review of the banks’ ratings by the agencies is a good thing. She is referring to a decision by Moody’s last month to put Lloyds, Royal Bank of Scotland and Santander UK on review for possible credit rating downgrades, saying that there will be no taxpayer-funded bailouts in the future. Flint says it’s a lagging indicator. Now is she asking: are the agencies wrong then? “They are just stating the obvious,” says Flint, as agencies factor in an expectation that governments would bail out their banks. Flint says the markets make a judgment about the possibility of default and bailout, which in turn feeds through to the rates bank charge each other to borrow – known as Libor. And the first question on competition. Are you too big to fail? she asks. Flint, who runs one of the biggest banks in the world and the biggest in the UK, says it’s easy for financial institutions to enter the market and compete on retail deposits and such like but harder on SME and business banking. “Virtually impossible” to compete for large deposits, such as from a house sale or pension, because wealthy investors will pick the most robust institutions. “I think there will be depositor preference for those institutions with the strongest balance sheets,” said Flint, talking about the “brand effect”. 3.09pm: So in answering the first pay question, Hester said: “To the extent able to carry less capital than in the past, that implicit subsidy could have fed through … to bonuses”. He cites better loan rates and higher employment too, as benefiting from the support of taxpayers in the markets. Ruffley doesn’t labour the point. Hester is citing Bradford & Bingley as an early example of breaking up a bank. The best bits – the branches and deposits – were sold to Santander at the end of September 2008 while the bad mortgages went to the taxpayer and have now been united with the “bad” parts of Northern Rock. 3.01pm: Ruffley wants to know what Hester and RBS support in the Vickers interim report. Hester’s retort? Strong capitalisation for banks, stronger liquidity as well as resolution powers for the authorities to take back parts of banks and bail-in powers, where more capital can be put in without taxpayer money. Ruffley says what is the government support for RBS. “RBS would have gone into liquidation without government support,” says Hester, who was appointed just as the bailout was happening in October 2008. Some £45bn has been used to buy shares, by the way, while the asset protection scheme insures the bank’s most troublesome assets. Ruffley’s questions are more about guarantees in the money markets, and he now wants to know if they have helped feed through into remuneration. 2.58pm: Hester is arguing that the City will know if bank reforms have worked in a few years’ time if ratings agencies stop trying to include government support into the banking sector. “One of the measures of whether they have succeeded in making banks stand on their own two feet is that the rating agencies do not ascribe rating for sovereign support,” said Hester. David Ruffley, Conservative, is asking questions now, and asking about the cost of the subsidiary from the taxpayer for the British banking sector. Hester says there is no agreement on the estimates and does not give a number. Oxera says its £10bn a year, as quoted in the interim ICB report and now being thrown at Hester by Ruffley. “Let’s try and make it zero,” says Hester. 2.57pm: Flint gave a pretty straightforward answer although Hester is being much more long-winded. “In the ring-fence part of what they are saying there are risks that need to be addressed,” Hester said. But Tyrie cuts him off to pull him back to answer: are you against a ring-fence? “Creating a ring-fence increases some of the systemic risk and decreases the ability of banks to withstand the risk and has significant costs,” said Hester. “It is our belief that it would be hard to create a ring-fence that improves upon the risk cost balance the commission is supporting,” he said. Hester is arguing that the losses in the system have been through regular lending not complex derivatives so a ring-fence concentrates risk. Early disagreement among the bankers then. 2.50pm: Complex question now about how derivatives should be treated. Flint, a former finance director, is getting intricate too. Flint is putting forward the argument that banks need to be able to include derivatives in the ring fenced back to price interest risk. It’s being likened to a “building society”. Hester is now being asked about the ring fence. “There are not black and white answers,” he says. 2.49pm: The Thatcher room is filing up. Hester sits first, now Flint. Tyrie is off, saying he wants a “public debate” on Vickers. He starts off with Flint, who has made proposals about how the ring fencing of retail assets could work. Is some sort of ring fence required? “I think it is required,” says Flint, because it would help to maintain the flow of credit that dried up during the banking crisis. “It was tragic,” he says. “If I were a policy maker I would seek to set aside the funding capacity from the intra-financial sector trading activity”. HSBC has submitted a three page note to the committee on how ring-fencing would work, and it will be published shortly, Tyrie says. Link here to the members of the committee, which is chaired by the Conservative MP Andrew Tyrie. 2.31pm: Treasury select committees have a pretty good track record for tripping up bank bosses. Ian Harley, who used to run Abbey National before it was taken over by Santander, admitted to one committee that “only with calculus could credit card interest rates be compared to choose the best card”. Matt Barrett, when he was Barclays boss in 2003, admitted he did not use his or anyone else’s plastic to borrow money “because it’s too expensive” and had been urging his four children not to rack up debts on their cards either. More recently, Bob Diamond, who ran the investment banking arm Barclays Capital in Barrett’s day, told the committee the period for remorse was over – which was not well received. Horta-Osório’s predecessor Eric Daniels had his moment of difficulty in 2009 when he described is £1m salary as “relatively modest”. 2.22pm: The bosses of Britain’s four biggest banks are being hauled before the Treasury select committee this afternoon to discuss the proposals put forward by the independent commission on banking (ICB) , chaired by Sir John Vickers. First up at 2.30pm are Stephen Hester, chief executive of bailed out Royal Bank of Scotland, who will sit alongside Douglas Flint, the chairman of HSBC, which was not bailed out. At 4pm Bob Diamond, chief executive of Barclays, and Stephen Hester, chief executive of Royal Bank of Scotland, more than 80% owned by the taxpayer, will take their seats. Hester is the longest serving of the four, having been parachuted in to replace Sir Fred Goodwin during the October 2008 bailout. Flint only became chairman of HSBC six months ago after a messy boardroom row elevated him from finance director, while Diamond stepped up from running the Barclays Capital investment banking arm at the start of the year. Portuguese-born António Horta-Osório is the newest, having taken the helm of Lloyds at the start of March after being bought out of the UK arm of Santander, where many had thought he stood a chance of one day taking the top job. None of them are keen on the ICB and the team run by Vickers, who wants to ring-fence the retail assets from investment banking assets. Horta-Osório is also far from impressed about the proposal that the bank sell of more than the 600 branches that the EU is already demanding. The branches being put on the block are now emerging and range from Cheltenham & Gloucester branches as far afield as Aberdeen and Torquay as well as Lloyds TSB Scotland branches. Banking Jill Treanor guardian.co.uk