Fear of a tough line from the Independent Commission on Banking (ICB) has stalked the banking sector for months. But its interim report, published this week, didn't prove too unpalatable and banks' share prices finished the day little changed. "The majority of UK banks will have heaved a sigh of relief that worst-case scenario - separating entirely the retail and wholesale businesses - has not been suggested," remarked analyst Nic Clarke of Charles Stanley.
But the commission's thinking does signal challenges. For example, it's considering a ring-fencing approach so that "retail banking operations would be carried out by a separate subsidiary within a wider group". Moreover, the commission favours a 10 per cent capital ratio for retail operations - well above the Basel III minimum of 7 per cent. However, it concedes that "capital standards applying to the wholesale and investment banking businesses of UK banks need not exceed international standards provided that those businesses have credible resolution plans."
Erecting such a retail and investment banking firewall, however, may not be so simple. "Many of the banks have integrated support services which will be harder [than branches] and costly to separate," says Andrew Gray, UK banking leader at PricewaterhouseCoopers. "Requiring banks to hold even more [capital] could force mortgage, loan and credit costs to climb." Professor Phillip Booth of the Institute of Economic Affairs believes tougher capital requirements could even undermine efforts to foster more competition: "Capital requirements are a barrier to entry for new firms."
It is the commission's views on boosting competition that have raised the most eyebrows. It concludes, for example, that the European Commission's requirement that Lloyds must sell 600 branches to compensate for the HBOS merger will have "a limited effect on competition unless it is substantially enhanced". Forcing the sale of more branches is better than a forced unwinding of the merger, but it does leave a "cloud over the stock until at least the final report", reckons Mr Clarke.
