Bank shares under pressure over Vickers shake-up

By Alex Brummer for the Daily Mail
Updated: 02:50 EDT, 15 June 2011

Shares in the major banks are expected to come under pressure in the coming days following the disclosure that the Chancellor will give his full backing to the proposals of the Vickers Report in his Mansion House speech tonight.

Radical: Shake-up is most far reaching by an advanced country since the 1930s

George Osborne will argue it is time to separate the investment or casino banking arms of the banks from their retail activities, which will have to be hived off into separate subsidiaries.

The Chancellor will stop short of full corporate separation but he will make clear that the retail banks will be required by regulators to be set up as separate entities with their own independent management structure, IT systems, staff and capital.

All the major High Street banks - Royal Bank of Scotland, Barclays, HSBC and to a lesser extent Lloyds Banking Group and Santander - will be affected by the Chancellor's decision.

Osborne's prescription will fall particularly heavily on Barclays, headed by Bob Diamond, which runs a global leader in investment banking alongside a big international retail bank.

The Chancellor will make it clear that he believes the separation is necessary to keep the deposits of ordinary bank customers safe and to reinforce the focus on consumer service and lending to small and medium-sized businesses.

It is also expected the Chancellor may give the go-ahead to a public auction for Northern Rock, the first of the banks to be taken into public ownership in the spring of 2008.

Osborne will say: 'This is a far reaching shake up to make High Street banks safer and protect taxpayers. Britain is now leading the world in learning the lessons from the disastrous failures of the last decade.'

The reforms fall short of the total separation required by the American Glass-Steagall Act of 1932 but will nevertheless be the most radical shake-up of the banking system attempted by any of the advanced countries since the 1930s.

It is thought the Chancellor will not signal how many branches he expects Lloyds to sell as part of its response to the Independent Commission on Banking.

But he is anxious the issue is resolved as soon as possible to remove uncertainty and he let him get on with the business of restoring the semi-nationalised banks to the private sector and returning cash to the exchequer.

Separating the consumer banking arms would also make it easier in the future for the boards of the big banks to sell off different arms if they felt that would enhance shareholder value.

The banks have expressed great concern about the cost of setting up separate subsidiaries and the legal complication of living wills, which could allow one arm of the bank to collapse without affecting the rest of the operation.