Banking reform: Impact on the UK's biggest banks

Canary Wharf
Image caption The investment banking arms of UK banks could suffer if the ICB recommendations are implemented

The Independent Commission on Banking's (ICB) recommendations will hit the bottom line of the UK's biggest banks.

Effectively removing the implicit state guarantee standing behind investment banks will increase their cost of borrowing.

This is because insisting that retail and investment banking divisions are separately capitalised means traders cannot use retail deposits as collateral against big investments.

The ICB also proposed that a higher proportion of assets - between 17% and 20% - be kept aside as a safety net in case of future financial crises, which would limit the amount of money they can lend and invest.

The ICB itself has estimated a pre-tax cost of between £4bn ($6.4bn) and £7bn for Britain's banks. With combined balance sheets totalling £6 trillion, this equates to about 0.1% of their assets.

But the BBC understands that, after successful arguing by HSBC, the Treasury will make the 17% to 20% rule apply only to international banks' UK balance sheets, not their full balance sheets.

The banks themselves may disagree, but which of the UK's big four banks will be hit hardest by these additional costs and the other recommendations put forward by the ICB?

Lloyds Banking Group

Lloyds is not a big player in the investment banking world, and so will be relatively unaffected by the ICB's call to ring-fence retail banks, which is specifically designed to stop High Street banks subsidising investment banks.

Nor will the commission's backing of the planned disposal of 632 of the bank's branches have any material impact on a sale that was already going to take place at the behest of European authorities following the government's bailout of the bank in 2008.

As Jonathan Newman at Brewin Dolphin says regarding the sell-off: "The commission is not pushing for anything over and above what is already happening."

These two facts are reflected in the Lloyds share price, which was higher in late morning trading before slipping back slightly.

Of course there is not a great deal Lloyds could do about the recommendations even if it wanted to, as the government still owns 41% of the bank.


The story at Barclays is very different. A substantial part of its revenues - 42% - come from Barclays Capital, its investment banking arm. And since Bob Diamond took over as chief executive last year, the focus has moved further towards investment and away from deposit-taking.

Potentially, therefore, Barclays has the most to lose from the ICB's recommendations.

Before the commission published its final proposals, Barclays let it be known that it may consider moving Barclays Capital to New York if it was forced to split its investment arm from its retail division.

Since the compromise solution of ring-fencing has now been put forward, there is little chance of that happening in the short term, says Chris Skinner, chairman of the Financial Services Club.

In the longer term, however, Barclays may yet decide to up sticks, he says.


Another bank with a large investment banking division is HSBC, accounting as it does for 27% of the group's overall revenues.

Together, the banks have argued that their retail arms offer very little in the way of subsidising their investment divisions. The ICB says there is no real way of knowing as the two have a combined balance sheet.

But Mr Kinahan argues: "The banks have been so vocal in their opposition [to the ICB's recommendations] there is every reason to believe the subsidy is very large."

Alongside Barclays, HSBC stands to suffer from the removal of this subsidy.

With regards to the requirement that banks should have enough capital plus loans that could be converted into capital to cope with losses equal to 20% of their total balance sheet, HSBC argued that this reform would affect it disproportionately.

This was because it is bigger outside the UK than inside, and compared with other British banks, it currently has relatively low reliance on unsecured borrowing from wholesale providers.

However, HSBC appears to have been successful in appealing on this proposal, as it is now expected to apply only to banks' UK balance sheets, not their full international balance sheets.

Royal Bank of Scotland

RBS also has a large investment banking division that accounts for about a third of group revenues.

Chief executive Stephen Hester has already said that the benefits of ring-fencing would be outweighed by the increased costs.

The difference is, unlike Barclays and HSBC, RBS can do very little about it considering the government owns 83% of the bank, again following a bailout during the financial crisis.

It's highly unlikely the government would implement any new regulations that would materially damage such a valuable investment.

But even by the most wildly pessimistic predictions, the government will have sold out of RBS long before 2019, the date by which the ICB would like to see its recommendations implemented.

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