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I see shares in the major banks rose yesterday due a collective sigh of relief that they have “dodged a bullet” following the interim proposals put forward by the Vickers review of the banking sector. Although there are greater requirements to hold tier 1 capital ratios at 10% as opposed to the current 7% and the ring fencing of retail banks from the riskier investment banks to protect deposits, the report stopped short of calling for the divestment of retail and investment banks altogether.
Such an approach would surely have been a hugely complicated affair; one can only imagine how much time and money it would cost to separate Barcap from Barclays or RBS Global Banking & Markets from RBS Group.
I also couldn’t help feel a little bit sorry for the shareholders of Lloyds Banking Group who were singled out for having a dominant position of 30% of UK current accounts. That is statistically true but only because they stepped into the breach to purchase HBOS during the worst point of the banking crisis, heavily encouraged by the Prime Minister at the time. With a limited window for due diligence available they unwittingly bought a book of commercial property loans that cost them a fortune in write downs. The Banking Commission have since branded the merger a “mistake” and are likely to enforce the sale of more than the 600 branches originally slated to possibly up to a 1000 branches. It would appear Lloyds has taken a big risk, endured significant financial pain but won’t be allowed to see much of an upside.
As this report is an interim one, no doubt Lloyds et al will be embarking on a major lobbying offensive over the next few months. Have the reforms been too lenient and has the Commission “bottled it” as some suggest? Have they gone too far and reduced the competitiveness of the UK banking sector by increasing capital requirements to greater than those of our international competitors? Due to the costs of restructuring have we just heard the death knell of free current account banking in the UK?
As ever, I would be keen to hear the views of interim managers within our network.
Andrew McIntee is a Director and Head of Financial Services practice.
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