So is Sir John preparing to break up the banks?

The independent Banking Commission starts taking evidence today and all options are open
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The Independent Online

Michael Geoghegan stepped back yesterday from the storm of speculation about his future at HSBC to fire a shot across the bows of the Independent Banking Commission (IBC).

As the commission prepared to publish its issues paper and start collecting evidence, Mr Geoghegan, the HSBC chief executive, warned against any attempt to break up the banks by mounting a defence of the so-called "universal model" that sees organisations such as HSBC combining retail, investment and commercial banking.

"A connected global economy needs connected global banks," Mr Geoghegan said in a speech to the International Conference of Banking Supervisors in Singapore. He noted that 70 per cent of profits at FTSE 100 companies were generated overseas, with an increasing proportion of medium-sized and even smaller enterprises doing business globally.

"In our connected world, customers also want broad-based banks that can provide a full range of financial services," he added. "All this is far from 'casino banking'. Indeed, I have been struck that, in the debate about banking reform, there seems to be so little understanding of the importance of wholesale banking for the wider economy. I am sure, in part, this represents a failure within the industry to communicate well enough. The phrase 'too big to fail' misses the point. We need to focus on making banks safer, not smaller."

Making banks safer is what the IBC is supposed to be doing. And Mr Geoghegan's remarks come at an apposite time. Despite much speculation to the contrary, the head of the IBC, Sir John Vickers, is understood to be preparing to disabuse the industry of the notion that breaking up the banks is off the agenda.

A UK version of America's Glass-Steagal Act, forcing a split between investment and retail banking, is being thought about. Whether it will actually happen in practice, however, is another thing entirely. It is worth noting that, along with consideration of a split (which is important to the Liberal Democrats and the Business secretary, Vince Cable, in particular) the commission must also consider the competitive implications of its recommendations: the get-out clause.

That is because the effect of forcing a break-up of the banks would be that half of the industry would up sticks and leave Britain. Mr Geoghegan, Bob Diamond at Barclays and Peter Sands, chief executive of Standard Chartered, have already indicated that this is very much in their thinking, even if they haven't exactly expressed the threat. Mr Geoghegan's speech was very much part of that trend.

However, it is not just a break-up that the commission will consider. It may stop short of that and instead recommend more technical changes to the banking industry's structure. Less meat for headline-writers there, but important nonetheless.

In his speech, Mr Geoghegan was beating the drum for the subsidiary model. "It seems clear that certain organisational structures may provide greater protection in the event that the worst happens," he said. "A model based upon separately capitalised local subsidiaries, such as we have at HSBC, for example, enhances security for depositors, regulators, and investors."

That argument will be furiously resisted a couple of blocks down from HSBC's Canary Wharf headquarters, where Barclays makes its home. It has a very different structure, based on individual branches. When it comes to the "never again" reforms, the banking industry isn't exactly in agreement.

Retail banks such as Lloyds also still have much to fear, given that the competitive state of that side of the business will also be scrutinised. Each bank will get the chance to make its points to the commission at individual hearings, modelled on those held by the Competition Commission. They will be followed by communiqués issued by the IBC secretariat.

A series of public debates will also be held around the country in major urban centres. London, Edinburgh, Leeds, Manchester, Birmingham and maybe Bristol can expect to host these. Early next year, when the hearings are complete and the written evidence has been collected, the IBC will go back into the shutdown mode that has (more or less) been in operation until today. An options paper will then be issued before more discussions are held and the final recommendations go to the Government. The Coalition could, of course, still choose to ignore the recommendations or farm them out for another review (if ministers have learned anything from the way New Labour did things when its "independent" inquiries came up with findings that were even vaguely controversial).

So even if a break-up – of whatever sort – is recommended, it might not actually happen. Mr Cable might pound his fists on the table, but the Chancellor, George Osborne, has kept his powder dry until now. He may well keep it dry by kicking whatever the commission comes up with into the Whitehall long grass. He might have to. The commission does have at least one member who is unlikely to shy away from controversy if she feels it is merited – just ask the management of life insurer Aviva.

Clare Spottiswoode, the former gas regulator, proved willing to put up a fight with Aviva when she did not approve of its ideas for divvying up its "inherited estate" of surplus assets between shareholders and policyholders as the "independent" policyholder advocate it appointed to scrutinise the plans.

Besides her and Sir John, the other IBC members include Bill Winters, a former JPMorgan banker, Martin Taylor, the former Barclays chief executive, and Martin Wolf, the Financial Times columnist. Let battle commence.