City nervous ahead of bank reform report

Shares in the UK's high street banks are likely to come under pressure again this week as the City digests the Treasury Select Committee's latest proposals for more competition in the sector ahead of next week's interim report from the Independent Commission on Banking.

In a damning critique of the UK's "oligopolistic" banking industry, the influential committee recommends making competition a primary objective of the City's new regulator, the Financial Conduct Authority, and a major shake-up in the way new banks and other lending institutions are encouraged into the market.

City analysts fear that any possible break up of the banks and the extra costs associated with reform will put further pressure on an already nervous banking sector. The shares will remain fragile until the ICB, chaired by Sir John Vickers, reports on 11 April.

The committee's report, which noted that a handful of banks control 85 per cent of the market, is particularly concerned about the concentration held by Lloyds and RBS, which are both partly owned by the state. It proposes that the new Financial Conduct Authority should be required to make competition a primary focus – possibly setting up a financial competition body reporting to the Bank of England.

While the report falls short of calling for a break-up of Lloyds, which has a 30 per cent share of the retail market following the rescue of HBOS, it calls on the ICB to look "over and above" the RBS and Lloyds divestments to promote competition. This could also include the mutualisation of Northern Rock or breaking-up different parts of the banks such as small business lending. It also criticises the lack of transparency for customers.

Andrew Tyrie, the Treasury committee chairman, said: "The chief executives of the large incumbents told us that retail banking was enormously competitive. But a far larger range of witnesses described the industry as close to an oligopoly."

On the "too big to fail" issue, the committee supports the view that a full break-up between retail and investment banking would not solve the problem and instead backs some form of subsidiarisation or legal "ring-fencing" between the two divisions.

In her Boost Bank Competition report published last week, Andrea Leadsom, a Tory committee member, called for radical reform to allow new banks to enter the market and allow consumers more choice. Over the past decade, bank numbers have fallen from 41 to 22, while in the same time the big banks' assets have increased four fold.

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