Big banks should be broken up

By Simon Duke for MailOnline
Updated: 08:17 EDT, 9 April 2011

Banks should be broken up in all but name to avoid a repeat of the financial collapse which cost taxpayers billions, a long-awaited report will recommend next week.

Caution: Fears are that banks will retaliate by lending less

The Independent Banking Commission will ignore banks' veiled threats to quit Britain and call for radical changes.

Sources said the commission's interim report, to be published on Monday, will propose separating banks' risky investment arms from their high-street operations.

Under the most radical option for so-called 'subsidiarisation', many of the major banks would be broken up in all but name.

The IBC will also call for sweeping reforms to give bank customers a better deal by increasing competition - including making it easier to change bank accounts. Banks have issued warnings about the prospect of break-ups with some, including Barclays and HSBC, hinting they could quit Britain.

Others have claimed they could be lumbered with extra costs approaching £15bn, forcing them to raise interest rates, but a Whitehall source said ministers think their claims were 'overblown'.

The IBC, chaired by economist Sir John Vickers, is likely to suggest a shake-out of the current accounts market and could propose giving customers portable account numbers they could move between different banks, as with mobile phone numbers.

The Office of Fair Trading estimates that banks make £9bn a year from personal current accounts. The bulk of the profits come from overdraft penalties and the practice of paying little or no interest to customers who keep their accounts in credit.

Fees are so opaque that Helen Weir, the departing head of Lloyds' retail bank, recently told MPs she did not know how much she paid for her own account.

Monday's report is also expected to increase Coalition tensions. Deputy Prime Minister Nick Clegg and Business Secretary Vince Cable are pressing for tough action to ensure there is no future need for taxpayer-funded bailouts.

However, David Cameron is said to be cautious about punishing banks for the sake of doing so, and some ministers fear lenders could retaliate by dragging their feet over demands to help small businesses and first-time buyers.

COMMENT by Daily Mail

Rein in the banks

Three years may have passed since the banks were bailed out by the taxpayer, but they continue to show the same contempt for the public.

Switching accounts is as difficult as ever.

Small and medium-sized enterprises continue to be starved of credit and the big banks have such a stranglehold they feel free to charge whatever they like. Meanwhile, as complaints against the banks soar, senior executives defy ministers by paying offensive bonuses.

That is why so many hopes are riding on Monday's report by the Independent Commission on Banking, appointed by George Osborne to bring some much-needed competition to the sector.

It is to be hoped the commission recommends splitting the big banks in two - forcing them to separate their retail services from investment arms which specialise in often reckless risk-taking. That way, no bank could arrogantly consider itself 'too big to fail'.

The problem is that the bankers - with characteristic hubris - have run rings around politicians for years. That is why, whatever the commission recommends, this paper is not holding its breath.