Vickers warns banks they will have to accept lower returns

The Independent Commission on Banking yesterday warned investors in Britain’s banks that lower returns would be the price to pay for a more stable financial system. Martin Wolf, one of the commissioners, said: “If you live in a world where the real rate of interest on a safe government bond is half a per cent or less you might wonder if you can reasonably expect a return of 15 per cent in a bank.

“It might suggest that [for] equity investors in banks an equity return of 15 per cent might not be what they are going to get in the future. Over a while they will get to realise that a lower return is reasonably attractive if it’s safe and solid and that is where we want to go.”

Most banks trade at below their book value – assets minus liabilities – because they hold troubled loans and investments after allowing their balance sheets to “explode” before the crisis, Mr Wolf said.

The ICB predicted that the total costs to the banks of implementing its reforms would be between £4bn and £7bn with at least half incurred from removing an implicit Government subsidy that allows banks to use retail banking deposits to fund investment banking business.

Barclays’ chief executive, Bob Diamond, cut the bank’s target for return on equity earlier this year from 15-20 per cent to at least 13 per cent, while HSBC’s boss, Stuart Gulliver, has set a target of 12-15 per cent. Bank shares fell yesterday in an up-and-down trading session as investors took stock of the ICB’s report and concerns about the eurozone. Royal Bank of Scotland was the biggest casualty among the banks, dropping 3.4 per cent. HSBC fell 2.4 per cent and Barclays and Lloyds Banking Group each shed 1.6 per cent.

In its final report, the ICB stuck to its guns in the face of frenzied lobbying by the banks ahead of publication by insisting that retail banking should be ring-fenced from investment banking and calling for British banks to hold bigger capital buffers than lenders in other countries.

But it made the ring fence more flexible than many of the banks had feared to allow retail deposits to be lent to large companies that do business with the investment bank as long as they are not financial institutions. Sir John said this dealt with the banks’ argument that deposits could be “trapped” and not available for lending to businesses in need of credit.

Sir John also set a long timetable for implementing his reforms while calling for early legislation in this Parliament to make sure the changes were made. He set the start of 2019 as the latest date for executing the changes, in line with the final deadline for Basel III capital rules.

Ian Gordon, a banking analyst at Evolution Securities, said: “Today’s ICB report is unwelcome and unhelpful, but it could easily have been a whole lot worse. Accepting the fact that the report was only ever going to represent bad news, there is cause for not immaterial relief.”

The ICB was also charged with increasing competition in the banking sector. It stopped short of demanding that Lloyds offload more branches than the 632 it has already been forced to offer for sale. Instead, the commission called on the Government to ensure sale led to a strong challenger bank, for instance by increasing the level of deposits that Lloyds offers with the branches.

Sir John also called for an overhaul of the process to switch bank accounts so that within two years customers could switch without inconvenience or risk. He said banks should make their products clearer so that they did not profit from customers being uninformed.

Most banks stayed quiet yesterday as they digested the ICB’s 360-page report. However, Barclays said: “It is important that the measures taken by the Government maintain a level playing field, securing the UK and London’s place as a global financial centre. “The measures taken must allow the UK banking industry to support economic growth. We welcome the focus on the importance of flexibility and pragmatism.”

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