Bank bosses called to account as break-up inquiry begins

The bosses of Britain’s biggest banks have been hauled in
to meetings with Sir John Vickers ahead of the publication this week of the key
issues he intends to examine in his independent review of banking.

Set up by the coalition to consider breaking up the
banks, the commission will on Friday make its first public statements as
Vickers, its chairman, and four other members begin their year-long review.
Their findings could lead to dramatic changes in the way in which the banking
industry is structured.

Vickers, an economist and former head of the Office of
Fair Trading, is understood to have already held discussions with the heads of
the banks that he regards as crucial to his inquiry – the Royal Bank of
Scotland
(RBS), Lloyds
Banking Group
, Barclays, HSBC and Spain’s
Santander.

The inclusion of Santander is crucial, analysts said, as
it demonstrates that the commission is not focused only on the politically
sensitive issue of whether “casino” investment banks should be carved
out of high street banks – a matter of concern to Barclays, RBS and HSBC. It is
also considering the wider issue of competition in the banking sector, which
has become more concentrated since the financial crisis.

Lord Oakeshott, Liberal Democrat Treasury spokesman, said
he believed both questions would be examined. “The commission has two
tough challenges – how to split investment banking from basic banking and then
give retail customers real choice. We Liberal Democrats believe it can’t and
won’t duck either of them,” Oakeshott said, as the Lib Dems gathered in
Liverpool for their party conference.

Santander has grown rapidly during the financial crisis,
adding Alliance & Leicester and Bradford & Bingley to its Abbey
National franchise. In addition, the Spanish bank is in the process of buying
318 branches that RBS has been forced to sell by the EU in return for the
taxpayer bailout.

Lloyds has also been transformed after being allowed by
Labour to rescue HBOS during the banking crisis, even though the deal breached
competition rules.

The two state-backed banks, RBS and Lloyds, could both be
affected by the commission’s recommendations, and the City minister Mark Hoban
has already admitted that any share sales will be delayed as a result of the
review.

A decision to recommend a carve-up of investment banking
and high street banking would force restructuring of RBS, while concerns about
retail competition could hurt Lloyds.

The commission’s meetings have been held in private until
now, but Friday marks the start of its attempt to conduct its work in public. A
handful of debates will be held nationwide to allow members of the public to
make their views known.

The five key banks are also expecting to be sent
questionnaires in the coming weeks, and the commission will set out its initial
thinking next March before finalising a report to present to the cabinet
sub-committee overseeing banking reform in a year’s time. That cabinet
committee is chaired by George Osborne, while HSBC’s outgoing chairman, Stephen
Green – who has promoted “big” banks – will have a seat at the table
once he becomes trade minister in the new year.

While the commission does not have any powers to compel
the banks to co-operate, sources believe that political pressure should be
strong enough to ensure that they comply with requests for information.

The other members of the commission are the former
Barclays chief executive Martin Taylor, former investment banker Bill Winters,
Financial Times columnist Martin Wolf and former energy regulator Clare
Spottiswoode.

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