The Coalition’s financial reforms could be seriously challenged this week by demands from the banking commission for a far more radical overhaul of British lenders.
In a report due on Friday, which is thought to be more Volcker than Vickers, the Parliamentary Commission on Banking Standards is expected to call for legislation to be drafted that would allow the banks to be broken up, rather than just ring-fenced.
The report, which is a response to the Bank Reform Bill, is not yet finished, but members of the Commission are said to be determined to beef up the Coalition’s reforms in the wake of more fines and criticism of the sector.
UBS (NYSEArca: DJCI - news) is braced for a fine of more than $1bn (£618m) in settlement with regulators investigating the global Libor rigging scandal. The penalty could be as high as $1.5bn, according to Swiss reports, and is expected to be unveiled this week.
Over the weekend it was also reported that the state-controlled Royal Bank of Scotland could be fined as much as £350m for its role in rate-rigging, although the settlement is not due until the new year.
Meanwhile Barclays, which has already paid a £290m Libor settlement, has been forced to defend itself from another $470m (£291m) penalty from America’s Federal Energy Regulatory Commission (FERC). In a defence filed in a US court on Friday night, Barclays (LSE: BARC.L - news) said FERC’s claim that the bank had manipulated electricity markets was “baseless” and “hollow.”
George Osborne, who established the Banking Commission in July, recently warned it members against “unpicking a consensus” on his plans to ring-fence retail banking operations as proposed by Sir John Vickers in his report.
But Andrew Tyrie, chairman of the Commission, is under pressure from members to toughen the proposals. The Tory MP is an admirer of Paul Volcker, the former chairman of the US Federal Reserve whom he credited with giving “extremely impressive evidence” on the separation of the banks.
During evidence sessions, Lord Lawson has pushed along the argument for total separation. Lord Turnbull, former head of the Civil Service, has also argued for radical reforms. However Mr Tyrie has also complained that the Commission is being rushed and needs more time.
Writing in The Daily Telegraph today, Antonio Horta-Osorio, the chief executive of Lloyds Banking Group (LSE: LLOY.L - news) , has argued that as well as “cultural change, there needs to be structural change in banking.” Although he stops short of calling for a Volcker-style division of banks, Mr Horta Osorio argues that “financial stability will be greatly enhanced from an ex-ante separation of retail and investment banks”. He adds: “That is why I fully support ring-fencing as the right way forward.”
However business leaders have urged the Government not to put economic recovery above their reforms. Archie Norman, chairman of ITV (Xetra: A0BLQP - news) , warned of “political indulgence” in pushing regulatory reforms. He told The Sunday Telegraph that “regulation and reserve capital does not come for free. It comes with a cost and the price of the attack on banks will be lower growth.”