Britain's high-street banks may be broken up to protect taxpayers from future collapses, under radical plans being considered by the Independent Commission on Banking.
Sir John Vickers, chairman of the ICB, yesterday gave the clearest sign yet that the commission could recommend to the Government a fundamental reform of the UK's high-street banks, including the option of splitting their retail and investment banking divisions.
George Osborne, the Chancellor, gave his immediate endorsement to Sir John's speech, pointing out that the worst option available to the taxpayer is keeping the "status quo".
But the threatened reforms came as the UK authorities were accused of attempting to undermine a Europe-wide crackdown on bankers' bonuses, which was finally agreed last year. A briefing document from the Financial Services Authority (FSA), the City regulator, showed Britain had tried to limit the impact that a European Union directive would have on bonuses paid to bankers, claiming it could damage their competitiveness.
Speaking to academics in London yesterday afternoon, Sir John accused the UK's banks of a "spectacular" failure to manage risk and said that, in future, struggling banks should be allowed to fail – without a taxpayer guarantee. "Not for the first time in history, banks and borrowers in the last decade took risks that went bad, systemically, and imposed huge costs on the rest of the economy and society," said the former Bank of England economist, adding that more must be done to curb excessive risk-taking, and limit the damage it does.
Sir John, whose final report will go to the Government in September, said the commission is still debating which are the best options to protect taxpayers from having to bail out the banks in any future crisis. These include some form of ring-fencing or a full division between the traditional deposit-taking part of banks and their investment-banking activities, which are considered riskier. "Retail and investment banking are risky, both are important and in places the boundaries between them are fuzzy," he said.
Behind the scenes, banks such as Barclays and HSBC have threatened to move overseas if the Government tries to break them up, because of fears that their cost of capital would become more expensive. But Sir John moved to counter this, pointing out that regulators worldwide are also looking at similar mechanisms to prevent banks being "too big too fail".
Treasury sources also made it clear that there is no difference of opinion between Mr Osborne and Vince Cable, the Secretary of State for Business, over whether banks should be split. The Chancellor, who set up the commission last year to review the structure and stability of the UK's banks after the financial crash, added: "I am glad John Vickers is today asking the tough, searching questions about how we protect taxpayers from banks that fail."
He added: "Labour politicians want to leave in place the system of regulating banks that they created because they can't bear to admit they got it so disastrously wrong."
The five-strong commission is also studying the competitiveness of high-street banking – and whether more can be done to allow new entrants – as well as the cost of capital in the capital markets. In another move, the Treasury and the high-street banks hope to announce their agreement shortly on new lending targets for small businesses, as well as restraint and transparency on bonus payments.
An estimated £7bn is due to be paid out but the Government wants the state-owned banks to cut back on bonuses. Last week, the US bank Goldman Sachs announced that its staff earned a total of £9.6bn in pay and bonuses in 2010 – equivalent to around £270,000 per employee, and there is speculation that some British banks will show a similar lack of restraint.
Labour MEP Arlene McCarthy claimed the UK had attempted to water down elements of the EU's Capital Requirements Directive on bank remuneration which introduced a range of measures including a 30 per cent limit on the amount of bonuses that could be paid in cash. In the document, circulated to coalition MEPs, the FSA argued against a ban on bonuses at state-owned banks, and called for lower limits on the cash elements of bonuses.
The new shadow Chancellor, Ed Balls, meanwhile said Labour would reapply the bank bonus tax, "instead of doing backroom deals with the banks on the disclosure of their pay".
He added: "It brought in £3.5bn last year, which could be used this year to help create the jobs and growth we need." A Treasury source played down the significance of the FSA document, and stressed the coalition's contribution to the crackdown on bonuses.