RBS boss issues separation warning

Royal Bank of Scotland refused today to support proposals to ringfence different banking operations (GETTY IMAGES)

The boss of the taxpayer-backed Royal Bank of Scotland refused today to support proposals to ringfence different banking operations and warned that the move could create more risk in the industry.

RBS chief executive Stephen Hester was being grilled over plans detailed by the Independent Commission on Banking (ICB) to separate the retail arms of UK banks from the riskier investment banking divisions.

Mr Hester told the Treasury Select Committee he could not give "black and white answers" when asked if he backed the move, and warned: "Creating a ringfence increases some of the systemic risk and decreases the ability of banks to withstand the risk and has significant costs."

But Mr Hester was joined in giving evidence by HSBC chairman Douglas Flint, who said a ringfence was required - although he would prefer it if there was not one.

Elsewhere, Mr Hester also conceded there could have been some "leakage" from taxpayer support into the bonus pool.

The Government commissioned the ICB report, which will be published in full in September, to review ways of avoiding "too big to fail" banks sparking another credit crisis.

Mr Hester explained there was a moral hazard attached to ring-fencing parts of a bank's business as it could encourage excessive risk taking.

He added that it would need to be tightly focused as it would be a mistake to try to second guess where any losses might arise in the future.

One of the recommendations of the Independent Commission was that Lloyds must sell more than the 620 branches, which it has to under European Union rules, but chief executive Antonio Horta-Osorio repeated his view to MPs that this would not be in the interests of customers, shareholders or the taxpayer.

He confirmed that the group would send out the information memorandum for the sale of 620 branches to interested buyers this week, with serious buyers having until the end of July to lodge their interest.

Discussions are ongoing with the ICB, but he said he had been given no indication of how many additional branches it might have to sell or what assets or liabilities it might have to divest.

He also dismissed concerns from the ICB that the company that buys the branches would be too small to be a serious competitor saying it was similar in size to Abbey when he took over and built it up into Santander UK.

Bob Diamond, Barclays' chief executive added that a ring-fence approach "would not be his first choice" but said the bank was working with the ICB on the assumption that there will be ring-fencing.