Shares in Lloyds Banking Group and Royal Bank of Scotland tumbled after it emerged that the Independent Commission on Banking had described the decision to allow Lloyds to merge with HBOS during the financial crisis as "wrong".
Lloyds yesterday fell 2.85p to 61.85p, making it the second biggest percentage faller on the FTSE 100 after only RBS, which lost 2.17p to 38.69p. Analysts have long feared that the two part-state-owned banks have the most to fear from the Commission. Lloyds is 41 per cent owned by taxpayers, RBS 84 per cent.
Sir John Vickers made his views clear in a paper presented to the Bank of International Settlements. The paper was published yesterday, but was written sometime ago.
In footnote one of the document Sir John says: "This working paper is a lightly edited version of the draft paper presented in Lucerne on 25 June at the 9th BIS annual conference on 'the future of central banking under post-crisis mandates'. That draft paper, dated 15 May, was written well before I was invited to chair the Independent Commission on Banking announced by the UK Government on 16 June."
However, it is still expected to raise eyebrows and a chill of fear in the halls of the two banks, particularly Lloyds Banking Group.
The Commission described the paper as "a personal view" yesterday and a spokeswoman insisted: "The Commission has reached no conclusions on what recommendations, if any, to make in relation to competition in retail banking."
Ian Gordon, analyst at Exane BNP Paribas, said in a recent note that he believed an expanded carve out from Lloyds – which is already having to sell 600 branches to satisfy EU regulators – was more likely than an out-and-out demerger noting that "even the UK Government's appetite for self-harm has limits".
Yesterday morning those limits became clear when Vince Cable appeared to soften his stance on bankers' pay and bonus disclosure. It follows signs of a furious disagreement over the Chancellor George Osborne's decision to axe plans to force banks to make disclosures on pay deals in favour of seeking a Europe-wide deal. Mr Cable, the Business Secretary, said in a radio interview that reforms could be achieved through international banking regulation and domestic reform "which is what the Chancellor is trying to do at the moment".