This article has been adapted from our sister site across the pond, Fool UK.
On Wednesday, U.K. Business Secretary Vince Cable said some bankers were "spivs and gamblers" who paid themselves "outrageous bonuses underwritten by the taxpayer."
"There is much public anger about banks and it is well deserved," he insisted to rousing applause from his Liberal Democrat party comrades.
On Thursday came the backlash -- not just from business leaders, but also from figures on both the left and the right who asked why if Cable really thinks the bankers are so out of control, he hasn't done anything much about them since getting into power.
Finally, on Friday, we got the beginnings of Cable and the U.K. Coalition Government's answer, with the Independent Commission on Banking (ICB) outlining the scope of its inquiry into what's to be done about the banks, and commission Chair Sir John Vickers urging everyone to have a say:
Experience shows that the risks from not asking hard questions about financial stability and competition are far greater than from doing so. Questions about the structure of banking need to be debated in an open, rational way, and we would like to invite anyone with an interest to provide us with views and evidence.
Pretty much everyone has an opinion on banks and bankers these days. We hope Sir John has warned his local postman to expect some heavier-than-usual mailbags.
The terms of engagement
While the ICB says it's keeping an open mind on how best to address the perceived flaws in U.K. banking, it has already set out what it sees as the main options for reform.
With respect to the structure of banks, the ICB is considering the following:
- Separation of retail and investment banking.
- Narrow banking and limited-purpose banking.
- Limits on proprietary trading and investing.
- Structural separability, including living wills and resolution schemes.
- Contingent capital.
- Structure-related surcharges.
It's also looking to the markets in which banks operate, which throws up two more areas for potential reform:
- Measures to reduce market concentration.
- Market-infrastructure reform.
The U.K.'s global banks face threats on several fronts: From potential reforms to separate the High Street deposits and mortgages that matter most to politicians from what they term "casino banking," from any impetus to divide up banks by even narrower criteria, and also from an ICB conclusion that says U.K. banking is too concentrated in the hands of just a few companies.
According to the ICB's figures, Lloyds Banking Group (NYSE: LYG), for instance, has a 24% share of the U.K. mortgage market and a 30% share of savings accounts. It would thus be a prime candidate for being split up on concentration and competition grounds.
In contrast, Barclays (NYSE: BCS) faces more of a threat from a verdict that says investment banking belongs under a different roof from savings and loans.
Big banks "R" Us
It's true that the U.K. banking market does seem pretty concentrated compared with other advanced nations. The ICB says there are 340 banks in the U.K., for example, compared with 2,000 in Germany and 8,000 in the U.S. (though France gets by with just 390).
Also, just six banks control 88% of U.K. retail deposits. In France, 10 banks control the same chunk of the market, while the top eight banks in the U.S. together enjoy a mere 35% market share.
From these figures, the case for splitting banks like Lloyds on competition grounds looks strong. But the British Bankers Association (BBA) has already responded to say this doesn't necessarily mean U.K. banking is uncompetitive.
In fact, the BBA claims that independent research has already shown that U.K. banks provide more choice, greater protection, and superior value for money than their international rivals.
The big question
What's more, big banks shouldn't necessarily be split on risk grounds, either. While it would be disingenuous to suggest that no big U.K. banks had problems (HBOS, anyone?) it's worth remembering that it was the smaller, more focused lenders such as Northern Rock and several minor building societies that really buckled in the financial crisis.
Moreover, there are two parts to the "too big to fail" equation -- size, certainly, but also the ability to fail gracefully.
If the much-discussed "living wills" that we're told banks have already begun investigating enable them to go bust without wrecking the economy -- wiping out shareholders in the process and potentially hitting bondholders, but not requiring emergency government funding or, worse, state ownership -- then retaining scale might not be incompatible with purging moral hazard from the financial system.
No obvious answers -- yet
Of course, these questions have been kicked about for years now, and so have the potential solutions -- so the share prices of the U.K.'s big banks didn't move much when the commission kicked off its inquiry.
The ICB's eventual decisions are another matter, however. Banks' share prices undoubtedly incorporate a regulatory fear factor that will be resolved only when the commission reports back within the next year. Adding to the uncertainty, both HSBC (NYSE: HBC) and Standard Chartered have already dropped hints that they may reconsider whether the U.K. is the best place for their global headquarters.
So what do you think? Do you think the banks should be split up? Perhaps you think the solutions proposed so far don't go far enough. Maybe only forcing bungling bankers to do a stint cleaning hospital toilets will assuage your anger?
As usual, we'd love to hear all your views in the comments section below.
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