Senior figures in the UK’s banking industry have told a Lords committee that government proposals to separate retail and investment banking arm would be costly and give little benefit to the economy.
Sir Win Bischoff, chairman of the Lloyds Banking Group; Ana Botín, chief executive officer of Santander UK; Bob Diamond, chief executive officer of Barclays; Douglas Flint, chairman of HSBC Holdings and Stephen Hester, chief executive of RBS, were giving evidence before the House of Lords Economic Affairs Committee on the report from the Independent Commission on Banking - commonly known as the Vickers Report.
The report recommended that UK banks build capital buffers larger than those required internationally, in order to better protect the sector against losses from unforeseen market events and to prevent the government from being drawn into another round of bail outs. It also called for banking groups to separate their retail arms, which take depositors’ money, and investment banks. The report’s recommendations must be implemented for 2019.
Stephen Hester, group chief executive of RBS, told the committee that increasing capital requirements above international standards would be expensive to the bank, and consequently “there will be a cost to the economy of that, but we think that cost will be worth it.”
However, on the commission’s recommendation that retail banking arms should be “ringfenced” to prevent high street consumers from being exposed to losses from investment banking arms, Hester said that it would add “significant additional costs to the economy, and that those costs will not be balanced by benefits.”
RBS’ £45 billion bailout during the financial crisis left it more than 80 per cent owned by the state.
Barclays’ Bob Diamond welcomed the certainty offered by the commission’s findings, but also said that “It would be wrong for me not to say that I think [ringfencing] added some costs to banking in the United Kingdom.”
The other aggregate measures, such as more stringent capital requirements, would provide adequate safety in times of financial stress, he said. Later, he defended his bank’s business model, which spans retail and investment banking.
Diamond said that diversification of banks’ returns should not be instinctively seen as a failure, saying: “We have to be careful about the risks that can build up in an inflexible business model”, and referencing Spain’s savings banks, which have narrow models and were severely stressed during the financial crisis.