Commission recommends banking system shake-up

The retail and investment arms of UK banks should be separated to protect taxpayers and business owners from a future financial crisis, the interim report of the Independent Commission on Banking (ICB) has recommended.

According to the report retail operations should be "ring-fenced" from their investment banking arms but Commission chairman Sir John Vickers stopped short of recommending total separation.

The report included measures to force future losses on bank bondholders and addresses the need for more competition in the UK retail banking market.

If the recommendations are enacted, Lloyds Banking Group would be required to sell off more of its branches in addition to existing EU orders for the bank to sell 600 outlets. 

The Commission added that banks also need to hold more cash in reserve to protect against future crises with large banks required to maintain a minimum equity capital base of 10% - or £10 of shareholder equity for every £100 lent out – 3% above the level set out in new European Basel III rules introduced last year.

The report comes amid continued press on UK banks to lend more to small businesses. Last week the British Bankers' Association announced a new process allowing smaller firms to appeal against decisions to turn down their loan applications. This development sits alongside the Better Business Finance campaign and the recently-introduced self-regulatory Lending Code, following on from the government's Project Merlin announcement in February. 

Commenting on the impact of the ICB's latest suggestions for entrepreneurs, John Walker, national chairman of the Federation of Small Businesses, said: "We welcome the idea of separating different arms of the banks as for the most part, small businesses have little alternatives than their bank for vital financial services.

“Through making retail and investment parts of the bank financially separate it will help to provide a continuous service for small firms in the event of a problem within another arm of the bank, meaning that the retail arm can continue to lend and that deposits held should be safe."

Iain Coke, head of ICAEW's Financial Services Faculty, wasn't quite so welcoming warning that new constraints placed on banks will pass down the line to their business customers. "Increasing capital requirements on retail banking operations may mean increase the costs of banking services for individuals and small businesses which do not have access to wholesale markets," he said. "These potential implications need to be considered in conjunction with the proposals to increase competition."

One entrepreneur meanwhile claimed that the government needs to do more than reform the current banking system and introduce a new bank focused solely on businesses.