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ICB chairman rejects accusations that commission ‘bottled it’ but admits extra costs might end up being paid by customers More than £1bn was added to the stock market value of three major banks after the independent commission on banking stepped back from endorsing some of the more radical options designed to ensure taxpayers will never again have to bail out the financial system. Sir John Vickers, chairman of the commission, reacted angrily to suggestions that the commission had “bottled it” but conceded banks might pass on the extra costs from his proposals to consumers. The commission was set up by the coalition to look at competition issues caused by Lloyds’ rescue of HBOS during the banking crisis – which only took place because Labour overrode normal competition concerns – as well how to avoid another taxpayer bailout of the banks. Vickers and his four commissioners sparked an angry reaction from Lloyds Banking Group by suggesting the bank should sell off “substantially” more branches to increase competitiveness on the high street, but did not provide any details of how many should be sold. To prevent another bailout, the commission suggested banks be forced to ring fence their high street banking business and also hold more capital – “at least” 10% compared with the 7% currently required by international regulators. The type of capital banks hold also needs to be able to absorb losses more effectively than during the crisis, he said. “Getting the taxpayer off the hook – limiting, curtailing the chance and the scale on which that kind of bailout would be needed in any future crisis – that means that the banks’ cost of capital is going to go up, because investors are going to have to take the risk that we, the taxpayer, have been taking,” he said. By stepping back from some of the more radical solutions suggested before the election – such as the complete separation of high street banks from “casino” investment banks proposed by business secretary Vince Cable – the commission left the banks “secretly quite pleased”, according to Bruce Packard, banks analyst at Seymour Pierce. Vickers insisted this was not the case. “I absolutely reject any notion we’ve bottled it. We’re absolutely independent from the banks and government,” the former boss of the Office of Fair Trading said. David Fleming, Unite national officer, said the report was disappointing: “We have waited for too long for these recommendations on banking reform, yet today we have been presented with nothing more then merely tinkering at the edges.” Vickers, an Oxford economist, stressed the report was merely a “window on our thinking” ahead of a final report that will be presented to the government in September after three months of consultation. “In no sense at all are these half measures … these are absolutely far-reaching reforms,” Vickers said. “This is an interim report, and when we are writing the final report in September, the language will be different. Even so, if these particular reforms were implemented as they are, they would be absolutely transformative to the industry,” he said. The “more moderate” proposals, he said, “will partly affect the profitability of banks, partly affect the remuneration of those who work for banks, and partly affect the costs to final customers and consumers”. Much of the focus turned to Lloyds, which was forced to issue two stock market announcements after the commission suggested more branch sales on top of the 600 branches already on the block to appease EU competition regulators. The report said more should be sold off to reduce Lloyds’ dominance: it has a 30% share of current accounts; 24% of mortgages – more than any other bank; and a 23% share of small business banking. But it stepped back from demanding that the controversial deal be unpicked. Even after the 600 branch sales demanded by the EU, Lloyds would have 18% of savings and 25% of current accounts. The report said there was “cause for regret” that competition law was altered to allow the deal to go ahead but “the facts in 2011 have to be taken as they are”. However, analysts noted that Halifax had 1,100 branches when it was rescued by Lloyds and any further demands to sell off branches might have the same impact as unpicking the merger. António Horta-Osório, who took over as chief executive of Lloyds last month, expressed surprise at the demand for extra branch sales. “This option appears to be based on limited evidence and may paradoxically potentially delay a new competitor coming into the UK market,” he said. The report raised the idea that Lloyds branch sales be packaged up with Northern Rock, which is already considering ways to return to the private sector after being nationalised in February 2008, to create a “new challenger bank”. Rod Carlton, a competition partner at Freshfields, said that if Lloyds did not agree to sell off more branches the commission appeared to be suggesting a full blown competition investigation: “This could have been proposed 18 months ago. It is difficult to see what stakeholders – particularly customers – would gain if it were proposed now. The government’s own plans to return the banks to private ownership could be delayed by the cloud of uncertainty that would hang over the industry for another two years.” However, Lloyds shares also rose, despite uncertainty caused by the need to sell more branches. Barclays and the bailed-out RBS were the biggest gainers in the FTSE 100, rising more than 2% each. Pete Hahn from Cass Business School, said: “Perhaps the fact banks are leading the FTSE 100 today is the best interpretation of the ICB report – the market believes nothing is likely to happen soon, if at all.” Lord Oakeshott, the Liberal Democrat peer who resigned as a party spokesman over the coalition’s lax treatment of banks, cautioned against interpreting too much from the day’s share price movement. “What matters now is that we don’t give in to the banks’ blackmail between now and the final report, and in September we must get on and act on Vickers,” Oakeshott said. The proposal that requires banks to ringfence their high street banking arms caused concern for lawyers, who noted that European banks could “passport” in to the UK to set up high street banks without needing to adopt the UK rules. Peter Green, partner at international law firm Morrison & Foerster, said: “It would be unfortunate in the extreme if these proposals led to the UK banks being at a competitive disadvantage with their European competitors. September’s final report needs to be a lot clearer on considering the implications of this mismatch.” There was also uncertainty about how much the ring fence of retail deposits would cost the banks. The commission said a £12bn to £15bn estimate was too high but noted that the prospect of government support cheapens bank funding by £10bn a year. Banking Barclays Lloyds Banking Group HSBC Royal Bank of Scotland Northern Rock Economic policy Financial sector Jill Treanor guardian.co.uk