Commission tackles too-big-to-fail banks

BBC business editor Robert Peston on the UK's retail banking market

The issues paper published today by the banking commission set up by George Osborne includes statistics indicating that the retail banking market in the UK is much less competitive than that of other developed economies.

Perhaps the most striking figures are that the top six British banks control 88% of all deposits in this country, compared with a 68% market share for Germany's top seven banks, and just 35% for America's top eight.

If the commission were to decide this concentration is unhealthy, it is Lloyds - which provides 30% of all current accounts in the UK - which looks most vulnerable.

The commission also says that it is unacceptable that certain giant banks are perceived to be too big to fail - because (no great shock to readers of this blog) that means individual bankers can take business risks to generate profits and bonuses knowing that, if all goes wrong, the taxpayer will pick up the tab.

But at this stage it is only laying out options about what might be necessary to correct these flaws in the banking system.

These options range from the application of forced radical surgery on banks to the imposition of new legally enforeable prohibitions on what they can do.

Breaking up universal banks to separate retail and investment banking is one option.

Another is to ensure that where a universal bank owns both a retail bank and an investment bank, formal "walls" are erected between the two, preventing any subsidisation of the investment operation by the retail bank, and making it unambiguous that the investment banking arm or subsidiary can go bust without harming the retail bank.

The commission will also look at whether retail banking should be carried out by so-called narrow banks, only permitted to invest customers' deposits in the safest, most liquid assets, such as UK government bonds (the commission doesn't sound breathless with enthusiasm for this option, because of the damage it might do to the credit-creation process).

Also, of course, the commission will look at the range of fashionable proposals (contingent capital, resolution procedures, bail-in provisions) for making sure banks' wholesale creditors are genuinely at risk for the activities of bank executives - and therefore might exercise proper oversight over them or at least charge big banks the proper risk-capturing rate when lending.

To put it another way, it's early days in the life of this commission. And we'll have to wait until it makes preliminary recommendations in March or so before we have a sense of quite how radical it will turn out to be.

In the meantime what is striking is the concern raised by the commission that there may be tension between its twin main aims of promoting financial stability and competition.

In crude terms, bankers who know that profits will fall into their laps, because the competition is so feeble, may take fewer risks than bankers who have to battle for a living.

But that's probably just another reason to make sure that in a competitive market, bankers know that they and their institutions - and not taxpayers - will suffer if they take crazy risks.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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