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Cleared for sell-off take-off

Douglas Fraser | 10:32 UK time, Monday, 11 April 2011

Boris Johnson is advising against "machine-gunning the bankers", and it seems that other instruments of splurged revenge are being eschewed by the Independent Commission on Banking.

Its interim recommendations, out today, prefer a form of slow tortured revenge, by increasing capital buffers and the banks' costs. The report has come down against the big break-up pushed by, among others, Vince Cable, when campaigning for the Lib Dems last year.

Now, the business secretary may have to make do with substantially bigger capital buffers and "subsidiarisation" - the hideous word that describes the creation of subsidiaries within a banking group in order to create firewalls between them.

In the part of the report tackling the lack of competition in British retail banking, Lloyds Banking Group is targeted for more of a sell-off than the 600 branches already being marketed as a European Commission condition for its bailout.

Sir John Vickers has not put a number on the "substantial enhancement" to that process. But one of the most immediate challenges of this interim report is whether the sale of 600 branches should be stopped, pending the requirement of a bigger sale.

And given that Royal Bank of Scotland already complied with European Commission conditions by selling more than 300 branches to Santander, there's now pressure on Lloyds Banking Group that it sells outside the Big Five high street banks, to enhance competition.

The RBS/Santander deal is now widely recognised as a missed opportunity for that, and as Lloyds has been slow to get moving on its sale, it could now find tougher conditions placed on selling to a smaller competitor.

Which bits of Lloyds Banking Group could be sold to increase competition? One relatively easy bit to split off could be Bank of Scotland, as it has retreated north of the border as the group's Scottish retail brand.

But as it's already selling off Lloyds TSB Scotland as part of the European Commission's requirements, there's not much logic in flogging both, as that would depress the price of both.

Royal sale

Sir John Vickers commission had a look at trying to undo the RBS sale to Santander, and stopping the complex process of disentangling branches, accounts and information technology, partly to see if it could also be enhanced. But it's judged that too costly and disruptive, and that RBS's market share is not as worryingly large as Lloyds Banking Group, so there's less need to act.

That is clearly good news for RBS, which had seen the Vickers commission as one of the biggest clouds on its horizon.

And if the interim recommendations turn to firmer ones with the final report in September, it means minds can turn to the next big issue for RBS and the bail-out process - the big sell-off.

Share prices still leave the UK government and taxpayer making a paper loss. But if we can assume that economic recovery should help the bank's recovery, the question is when and how its stakes in RBS and Lloyds are to be sold off.

A big break-up of the banks would have reduced the market valuation of those shares, meaning there has been, and remains, a conflict of interest for the British public between maximising shareholder value on one hand and, on the other, the appeal of reducing risk to the government while increasing competition for customers.

Capital buffers

Without a break-up of the banks, they may still lose profitability from increased capital buffers proposed by Vickers.

But it seems the biggest obstacle on the road to a big government sell-off has just been cleared.

And where the consequences of such major reform can be hard to predict, here's a thought about the split into distinct subsidiaries: if the divisions of the banks are to have their own capital bases, and to have firewalls required between them, doesn't that make them easier for future bosses to break up, rather than the regulators?

It has to be one of the possibilities for Lloyds and RBS that their eventual exit from government ownership and return to the market will leave them vulnerable to break up by new owners, just as RBS tore apart its Dutch purchase, ABN Amro, four years ago.

Comments

  • Comment number 1.

    Who caused the economic catastrophe?
    The huge investment banks too big to fail that in their brashness and greed could not or would not act with intergrity and discernment. They have proven to the world that they need more than firewalls; they need splitting into investment and retail. They need a financial activities tax - both for auditing for nefarious products and repairing the damge they have caused to social programs.
    In this way, if you want to bank (as in borrow, save), go retail.
    If you want to gamble, well...look for an investment bank.

  • Comment number 2.

    Does the customer have a say in who they bank with?
    If my branch is sold off does my account go to the new bank?
    What if the terms and conditions have changed when I try to move my account back to Lloyds?

  • Comment number 3.

    I used to be a BOS customer but I didn't like their foreign ownership which introduced the rip-off £1/£5 per day overdraft charges.

    So I moved to Airdrie Savings Bank, no complaints; now Scotland’s only bank!

  • Comment number 4.

    With a government bent on 'Increasing Competition' within the banking industry, how is it that the following events can be seen to increase such competition?

    Abbey... sold! Now SANTANDER
    Alliance and Leceister.....sold! Now SANTANDER
    RBS English Branches ..... sold! Now SANTANDER

    I certainly don't see how this increases competition in the banking industry, rather it appears as a formation of a monopoly by... you guessed it SANTANDER.

    Can't help but wonder where Lloyds is going to be sold to????

  • Comment number 5.

    #4

    Yep .... and Spain is the next country most likely to go bust and need a Euro bailout.

  • Comment number 6.

    In my dellusional state of mind I say 'Just wait till the revolution ALL BANKERS will be the first to be put up against the wall & shot unless they blab where all the do$h is $ta$hed....Then I wake up and see that its business as usual, or if you like history repeating itself!

  • Comment number 7.

    This comment has been referred for further consideration. Explain.

 

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