Banks to separate savings and investments in system overhaul

Report to recommend that customers' deposits are ring-fenced, but change could take years

Britain's biggest banks are bracing themselves for a government-commissioned report tomorrow that will recommend a fundamental overhaul of the way they do business.

The interim report by the Independent Banking Commission (IBC) is expected to propose that banks separate their traditional functions, such as savings accounts, from riskier investment banking divisions. It is also expected to say that the merger of Lloyds TSB and HBOS at the peak of the financial crisis was an error, and that Gordon Brown should not have waived competition law to enable the merger to take place.

The IBC, chaired by the former Bank of England chief economist Sir John Vickers, was charged with finding ways of bringing greater stability to the banking system. The coalition wants to ensure that the taxpayer never again has to bail out banks should the financial bets of their investment teams cause massive losses.

The proposals will stop short of splitting up the banks. Instead, these "universal banks" will in effect have distinct subsidiaries, so that high street deposits could not be used to underwrite investment banking gambles in the capital markets.

However, there were warnings yesterday that this could vastly increase the cost of borrowing and take years to implement due to technology difficulties. David Sayer, global head of retail banking at the accountant KPMG, said: "If the use of customer deposits is restricted, the cost of loans could go up." If high street deposits can no longer be used to support lucrative investment banking deals, then there is little incentive to keep loans cheap.

There is also confusion as to whether lending to corporates will be considered part of the retail or investment banking divisions. If business loans join investment banking, their cost could go up.

Unravelling the functions will take time. Ben Wilson, head of financial services at the technology industry trade body Intellect, warned: "It is a fair assumption that this could take up to three years. There are legacy systems built on legacy systems, layer upon layer [of data] over a couple of decades." He added that cash machines have failed for hours at a time after merger deals because IT systems failed to mesh.

The big banks, such as Barclays and HSBC, have been lobbying against strict ring-fencing between retail and investment banking divisions because of costs estimated at up to £15bn a year. Critics also point out that the big bank collapses during the crash would not have been prevented by separating business functions.

However, it is understood that over the past few weeks there have been more useful discussions between the IBC and the banking chiefs. Treasury sources said that George Osborne welcomed the structural reforms but would not give his backing to specific recommendations until the report had been fully debated by Parliament.

The Treasury Select Committee is expected to be broadly supportive, with one member saying that having separate banking divisions under a main holding company "ticks all the boxes". The committee chairman, Andrew Tyrie, added: "This is the most important set of reforms to the banking industry for generations and will, hopefully, create safer banks. But it is also essential that the proposals push for more competition."

The number of UK banks has halved in the past decade, meaning that depositors have been unable to shop around for better credit terms. In his blog yesterday, the Shadow Chancellor, Ed Balls, wrote: "We need tough action to promote greater competition too, including making it easier for customers to move their main bank account."

However, he warned that banking reform required international agreement, so that banks did not move operations to countries with lighter regulations. "If George Osborne fails to secure international consensus and we see those jobs move abroad, he will be letting Britain down."

The commission's final report is due in the autumn.

PROMOTED VIDEO
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
News
i100
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
News
In other news ... Jon Snow performed at last year's Newsroom's Got Talent charity event
people
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Text messaging changes as a relationship evolves
life
News
The comedian, 42, made the controversial comment following the athlete’s sentencing to five years for the culpable homicide of Reeva Steenkamp on Tuesday
peopleComedian's quip about Reeva Steenkamp was less than well received at music magazine awards
Sport
Cristiano Ronaldo in action for Real Madrid
football
News
peoplePerformer had recently been diagnosed with prostate cancer
Life and Style
food + drink
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?