'Big four' banks line up to oppose ICB's call for retail ring-fencing

Barclays say the benefit of ring-fencing is 'marginal at best' and it will impose costs which will be passed on to the customer

Britain's banks have lined up to oppose reforms proposed by the Government's Independent Commission on Banking (ICB).

In submissions to the ICB, the "big four" banks – Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group – raised objections or tried to buy time on the ICB's proposals.

The key bone of contention is the ICB's call for ring-fencing of retail and investment banking to protect economically vital functions from trading and other volatile activities.

Barclays, HSBC and RBS called for delays in implementing any ring-fence to guard against hasty action and let other new regulations bed down. Barclays and RBS, in particular, claimed the move could increase rather than reduce risk in the financial system.

Barclays said the benefit of a retail ring-fence was "marginal at best" and would impose costs on banks that they would have to recoup from customers. It also claimed attempts to estimate the implicit taxpayer subsidy for the banking sector – put at more than £10bn by the ICB – were "simplistic".

RBS claimed the subsidy had already been eliminated by new rules and said ring-fencing was at odds with the ICB's mandate to increase financial stability.

HSBC said the plan would threaten Britain's position as a base for international companies and cause the UK's wholesale banks to wither.

The submissions responded to the ICB's interim report, published in April, which set out broad proposals. The commission is due to publish its final report on 12 September.

Lloyds, Britain's biggest retail bank, argued a ring-fence could increase financial stability but agreed with its rivals that separation could hurt the economy by limiting the supply of credit. The bank focused its objections on the ICB's call for it to sell more branches to increase competition.

Lloyds argued the demand was "disproportionate and discriminatory" and amounted to an improper reversal of its emergency takeover of HBOS at the height of the crisis.

The bank, which is already selling 632 branches under a deal with the European Union, pointed out that the ICB had rejected undoing the HBOS merger as an option in its interim report.

Virgin Money, a potential bidder for Lloyds' branches, argued that adding assets such as insurance to those on offer with the branches was preferable to forcing the sale of more branches.

The Good Banking Campaign, launched yesterday, said the ICB had not gone far enough.

Neal Lawson, the chairman of the Compass pressure group, which is joint organiser of the campaign, said: "Banking regulation is now their [the ICB's] decision on their watch – they have the chance to get it right or the country won't forgive them if they get it wrong."

Corporate changes

Imminent regulatory and accounting changes could make life insurers less willing to hold corporate bonds, restricting companies' access to a vital source of funding, the Bank for International Settlements (BIS) has warned. The changes, which include Europe's proposed Solvency II capital rules, could push the sector into holding sovereign debt at the expense of equities or corporate bonds, the central bankers' bank said.

Ratings agencies have warned that Solvency II, which requires insurers to hold capital in strict proportion to the risks they underwrite, could prompt the sector to sell large volumes of equities when the regime takes effect in 2013.

The BIS also warned that the capital rules and regulators assessing solvency over short time frames could undermine insurers' role as long-term investors.