PRODUCT PROFILE

Latest Dublin Prices

Banks could quit UK if asked to separate

Wednesday, October 31 15:28:46

Banks could leave Britain if they are asked to fully separate retail and commercial operations from their investment banking activities, former Barclays Chief Executive Martin Taylor told lawmakers today.

The Independent Commission on Banking recommended last December that lenders formed barriers between their retail operations and riskier investment arms to offer consumers better protection in any future financial crisis. However, it stopped short of backing full separation.

"Had we mandated a full split, one or two banks could reasonably have asked themselves whether they would want to move," Taylor, one of the authors of a government-commissioned review of the industry, told the Parliamentary Commission on Banking Standards today.

Taylor said that having a ringfenced retail bank would give the benefits of simpler supervision without going all the way to a full split, which has been advocated by Paul Volcker, the former Federal Reserve Chairman who has been at the forefront of regulatory debate in the United States.

Taylor said that maintaining both sides of the bank within a group structure would enable the retail bank to be rescued if it got into trouble and suggested full separation would lead to a British banking sector comprising only large retail banks with no earnings diversification.

Financial services account for around 8 percent of Britain's gross domestic product and there were just over 280,000 financial services jobs in London in 2011, according to the Centre for Economics and Business Research (CEBR).

UK finance minister Nigel Lawson, who is sitting on the commission and is known to favour a complete separation of a bank's retail operations, took a contrasting view.

"Some of us find it difficult to conceive how there can be two diametrically opposed cultures within one and the same institution and with, incidentally, one and the same group of shareholders," he said.

The parliamentary inquiry was launched in response to the government coming under pressure to more rigorously scrutinise banks following a raft of scandals including Barclays being fined for manipulating interest rates.

Taylor, who ran Barclays from 1994 to 1998, also raised concerns about banks with large overseas exposure effectively funding their international operations through their British retail banking businesses.

"My concern is that HSBC, like Barclays and RBS has been running its global investment bank off its UK retail bank balance sheet. I think this is just bad practice and it's almost a health and safety issue," he said.

The banking standards commission is expected to make legislative proposals by Dec. 18. (C ) Reuters