Banks face the threat of being broken up if they do not implement reforms aimed at improving their behaviour.
The government-backed Commission on Banking Standards is looking at the possibility of keeping legislation to split retail and investment banks on the statute books as a “nuclear option” if plans to “ring-fence” banks’ businesses prove inadequate.
It is one of several ideas that will be discussed this week ahead of the expected publication on Friday of its report on the Bank Reform Bill.
The Bill, which is currently going through Parliament, at present proposes the ring fence, which was recommended by Sir John Vickers, chairman of the Independent Commission on Banking.
Andrew Tyrie, the Conservative chairman of the standards commission, will meet the body’s nine other members, including Lord Lawson of Blaby, the former Chancellor, and Justin Welby, the recently appointed Archbishop of Canterbury, on Wednesday to discuss the report.
George Osborne gave the commission the task of handling the pre-legislative scrutiny of the Bill in September, but last month warned its members about “unpicking a consensus” over bank reform. Lord Lawson has been a vocal advocate for the full separation of banks but other commissioners are more cautious.
If ring-fencing — which will involve lenders creating a firewall between customer deposits and their riskier investment banking activities — does not properly safeguard the financial system, keeping the option of splitting up banks would offer a compromise between the two sides. The commission’s position is known to have hardened following the disclosure of money laundering and Iranian sanctions-busting by HSBC (LSE: HSBA.L - news) and Standard Chartered (Other OTC: SCBFF.PK - news) .
The commission will also have to give its views on how the ring-fenced structure should work. In particular, it has been asked to say whether the ring-fenced bank containing the retail operations should be able to offer derivative products.
Neither Sir John’s committee nor the Treasury have offered a definitive view on what is seen as a key question.
The parliamentary commission has complained to the Chancellor that it has not been given enough information to scrutinise the reforms properly as many details are being left to secondary legislation.
Members of the commission have warned they fear they are being asked to give the government a “blank cheque” on banking reform, allowing it to put through measures without proper parliamentary oversight.
Ed Miliband, the Labour leader, had called for a judge-led inquiry in the style of the Leveson Inquiry into media ethics.
The main report from the commission is expected some time in the early months of next year and it will make a series of recommendations on how to fix the cultural problems that have seen Britain’s largest banks become involved in a series of scandals.
The commission is also carrying out its own detailed investigation into the failure of HBOS that could see it producing its own findings ahead of the publication of a Financial Services Authority report.
Mr Tyrie and other commissioners believe that it is vital to examine the circumstances of HBOS’s collapse carefully to understand what changes are needed in the banking industry.
The Commons Treasury select committee, which Mr Tyrie also chairs, last year sent in independent reviewers to oversee the FSA’s report into the failure of Royal Bank of Scotland (LSE: RBS.L - news) . It was only published following pressure from the committee and other senior politicians.
RBS failed in part due to the losses made by its investment banking arm, giving weight to those who argue lenders should not be able to operate a universal banking model whereby retail and investment banking businesses are contained within one bank.
Speaking to The Daily Telegraph last week, Andrew Bailey, the head of the Bank of England’s prudential regulatory authority, said he expected that banks would be having an “active debate about the size of their investment banking operations going forward”.
RBS is already in the
process of cutting back its trading and markets business amid pressure to become more risk averse.