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Britain’s battered banks prepare to awake to a new dawn

The much-anticipated report from the Vickers independent commission on banking is published on Monday. It seems unlikely that it will satisfy everyone

The bosses of Britain’s biggest banks will receive a fat document that sets out a vision for the future of their industry at 5am tomorrow. They do not expect to like what they read. Two hours later, that report, by Sir John Vickers’s independent commission on banking (ICB), will be released publicly – no doubt unleashing a wave of analysis from experts and politicians about whether the plans go far enough to prevent the necessity for another taxpayer bailout of the system, and increase competition.

Reform of the banking industry goes right to the heart of the coalition’s agreement for government. It was item one in the formal arrangement for government published last May when the Liberal Democrats gave the Tories the majority they needed to form the government.

Business secretary Vince Cable had won himself many followers in opposition when he called for the full separation of high street banks from their risky investment banking businesses.

But when Vickers, an Oxford academic and widely admired former boss of the Office of Fair Trading, published his interim report in April, he was accused of “bottling” the issue.

Instead of advocating a clean break, as supporters of Cable might have hoped for, Vickers and his fellow commissioners came up with the idea of “ringfencing” high street banks to protect them from their parent groups’ riskier operations.

Bank shares rose that day and bankers breathed a sigh of relief: this was not as painful as they had feared. But since then, the mood has changed, and banks have embarked on an extensive lobbying campaign to attempt to show just how “damaging” a ringfence might be, and convince Vickers to water down the idea.

Bank stocks have dived. Shares in Barclays have more than halved from their peak in February and those in bailed-out Royal Bank of Scotland and Lloyds Banking Group have sunk so low that any prospect of the government reducing its stake in them looks a distant hope. Ian Gordon, an analyst at stockbrokers Evolution, said: “Banks have always been ‘macro beasts’, uniquely vulnerable to the economic consequences of political decisions as well as the underlying fundamentals. However, ahead of the ICB’s report, the political influence on bank share prices has reached a new crescendo.”

Analysts at UBS reckon the commission has been bad news for taxpayers, who have injected £65bn into RBS and Lloyds. “While it is not politically acceptable to appear ‘soft’ on the banks, we think an astute outcome would be to recognise that UK banks have moved a long way from their pre-crisis state and demand that they now work for their shareholders, principally the UK taxpayer,” the UBS analysts argue.

Full details of the proposed reforms will become apparent tomorrow, as highly paid lawyers and banks attempt to work out the implications of the report’s conclusions on how wide and how high the ringfence should be.

Crucially, the report will also offer a major concession to Lloyds, which was facing the prospect of selling off even more than the 632 branches it currently has to divest to comply with EU regulations on state aid. Lloyds and its new chief executive, António Horta-Osório, had been infuriated by the interim report’s suggestion that the sale of 632 branches and a 4.6% market share would not be enough to inject fresh competition onto a high street the bank now dominates, after Labour changed competition rules to enable Lloyds to rescue HBOS during the 2008 banking crisis.

But Horta-Osório has staged a seemingly successful bid to convince Vickers that there is no need for the size of the divestment to be increased.

The final report is expected to be a fillip for both NBNK, the new bank set up by former Northern Rock boss Gary Hoffman, and the Co-op, as Vickers is now ready to allow Lloyds to sell its branches to a bidder that already has a small foothold in the market.

Co-op already has a banking presence in the UK and NBNK’s shares were suspended on Aim last week, apparently because it is in talks about buying the UK arms of National Australia Bank – Clydesdale and Yorkshire – onto which the Lloyds branches could be bolted.

Much of the focus, though remains on the ringfencing idea. Banks claim that it will costs them more to fund their businesses if they are ringfenced, which in turn will encourage them to raise the price of loans to firms and consumers. This could damage an economy that is already in a fragile state, according to the respected Ernst & Young Item Club forecasting group, which reckons it could knock 0.3% off gross domestic product.

The prime minister appeared to acknowledge the argument in his remarks last week. “It seems to me there are two vital things we have to secure – a safe and secure banking system for the future but also proper bank lending, including to small businesses, right now in our economy.”

The expectation is that chancellor George Osborne, when he addresses MPs tomorrow, will cautiously endorse the report and pledge to respond formally by the end of the year. Legislation will be brought forward to enforce the changes but banks will probably be given leeway until, say, 2015 to implement the changes – although Peter Snowdon, financial services partner at international legal practice Norton Rose, argues this may not be much help for the banks. “Even for a longer implementation timetable, it is likely that regulators will anticipate that banks should be starting formal planning sooner rather than later,” he says.

Even so, pressure groups are keeping up their calls for a speedy response. Peter Vicary-Smith, chief executive of consumer group Which?, says: “By immediately putting in place a timetable for meaningful reforms, the government can reassure the public that banks haven’t been let off the hook.”

But the harshest critics of the banking industry – the unions, which have calculated that 150,000 financial services jobs have been lost since the banking crisis – will not be easily satisfied. TUC general secretary Brendan Barber will use his speech to the opening day of his organisation’s congress tomorrow to call for an even more radical overhaul. “The Vickers team have been asked how to make the banks safe, but the real question is how we make them useful,” he will say. “Banking should be a utility just like energy and water – supplying credit and the other services that our productive industries and services need.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds