HSBC and Lloyds to question Vickers Commission's ring-fencing of retail banks

Later today (30 June) in the House of Lords, evidence will be gathered concerning the on-going programme to ring-fence the UK's retail banks - thought be a factor swaying the possible departure of HSBC HQ from these shores.

The House of Lords Economic Affairs Committee will hear from Sir John Vickers, former chairman of the Independent Commission on Banking, followed by Jonathan Symonds, chairman of HSBC in the UK and Europe, and George Culmer, executive director and chief financial officer of Lloyds.

Lord Hollick, chair of the Economic Affairs Committee, told IBTimes: "We took evidence in 2011 to look at what should be done. And here we are three and a half or almost four years later, taking the temperature again.

"It will be interesting to see what John Vickers thinks, whether he has changed his view, if he still feels it's the right way forward.

"We need to consider things like changes to capital ratios, behavioural issues like loan to value - all these things have a bearing on this. Do they go far enough and do they work effectively together? Do they offer a high level of protection to the taxpayer?"

One area the committee will look at is the cost of ring-fencing (estimated to be about £4bn per year), asking if this will end up being borne by customers.

People in the UK have become used to free banking. But it's not really free. It has always been paid for by risk incurred by the other side of the bank. A return to vanilla style banking will mean more bank charges.

Stable door slamming in respect of some iniquitous banking contagion also seems to ignore the fact that the financial crisis was caused by investment-only banks like Bear Stearns, Lehman Brothers and Merrill Lynch, not banks with both investment and retail arms. Ring-fencing would not have prevented the crisis.

A vocal opposition of Vickers' demands, HSBC has cut reams of staff and the bank is now mulling a move of its HQ from Canary Wharf to a base in Asia, probably Hong Kong. It said it will establish a rebranded retail operation in the midlands.

This is dampening the UK's competitive advantage. Big banks like RBS have turned their back on wholesale banking in order to cater to this country's anorexia towards investment banking.

This cultural swing is hardly surprising: bankers behaved badly. But we should remember that big corporate and investment banking operations like RBS's served a lot of clients, employed many skilled bankers and held squillions in corporate assets – much of it the bad part that's being wound down and sold off.

This allows competitors from places like Germany (Deutsche Bank, basically) to step in and sweep up that business and become dominant not only in Europe but on a global stage.

It is also possible to argue that banks are more robust, the more diverse their operations are. For instance, during the Great Depression, the US's restrictions on interstate banking were very harmful. Banks had all their eggs in one basket and thousands of US banks failed, whereas none of Canada's half-dozen banks, which operated nationally, collapsed.

Sam Bowman, deputy director, of the Adam Smith Institute, told IBTimes UK: "Basically I think the Vickers Commission has come up with the wrong solution to the banking crisis.

"As I see it, we could either try to create a narrow banking system, where depositors' money is only lent out to extremely safe borrowers (e.g. the US, UK governments) and traditional loans are made by different financial institutions where the 'depositors' (more accurately described investors in this case) do not have immediate access to their funds, or we can try to make the banking system that we have as stable as possible.

"For stability, we want banks that are diverse and can withstand unexpected shocks. This is exactly the opposite of what Vickers will do – by splitting investment and retail arms of banks, Vickers makes both arms less steady.

"It's a mistake, I think, to equate systemic importance with size – America has thousands of small banks, but because they are very undiverse they are much more fragile than, say, Canada's banks, which are fewer in number but much more diversified," he said.

The legislation to push for ring-fencing was proposed under the previous government. At that time the Parliamentary Commission on Banking Standards received broad support from all parties.

But HSBC's revelations will have ratcheted up political pressure: so have the Tories got ring-fencing in their gunsights?

"I don't detect any changes," said Hollick.

Once enacted the legislation will require banks to comply with the new ring-fencing legislation as soon as practicable. Non-structural changes relating to loss absorbency are to be implemented in stages and fully completed by the beginning of 2019.