Bank reforms &#39;are high noon&#39; for coalition

Lib Dem peer says ministers must back proposals from the independent commission on banking, due to be published on Monday at 7am, as 'radical reform was why we signed up with the Tories'

The coalition faces a "high noon" over its plans for the major banks as the government's independent commission on banking prepares to set out ideas for a possible wide-ranging reform of the industry following of the financial crisis.

Analysts at Goldman Sachs predicted Barclays could be most affected by proposals from Sir John Vickers and his four commissioners, followed by the bailed-out Lloyds Banking Group and Royal Bank of Scotland. HSBC and Standard Chartered are likely to be least affected by the reforms, which could force banks to dramatically change the way they run their operations.

Lord Oakeshott ? who resigned as a Lib Dem Treasury spokesman in the Lords over the failure to crack down on the banks ? is keeping up the pressure on the coalition on Friday to adopt the recommendations, despite warnings from the major banks that they could quit London if reform is too radical.

"Radical reform of the banks is right at the heart of the coalition agreement and a key reason why Nick Clegg, Vince Cable and the rest of us signed up with the Tories. It's high noon for the coalition if we bottle out after Vickers' final report," said Oakeshott.

The 200-page interim report was handed confidentially to senior ministers and their advisers as well as regulators tonight, ahead of formal publication at 7am on Monday. The banks will receive a copy an hour earlier. Such is the sensitivity of the report, every page of every copy has been stamped with the recipient's identity.

The commission, which was set up in June, is regarded as a key concession to the Liberal Democrats ? particularly Vince Cable, who called for a break-up of the banks to separate their high street branches from their "casino" investment banking arms ahead of the election.

However, Treasury sources were insisting that there were no divisions between Cable and George Osborne.

"George and Vince set this up. Both went into the election arguing against the status quo," a Treasury source said.

The commission has two remits ? to address the stability of the banks in the wake of the taxpayer bailout and to tackle competition following the Lloyds rescue of HBOS, which left the enlarged bank with a 30% share of current accounts, 24% of mortgages ? more than any other bank ? and a 23% share of small business banking, second only to RBS.

Monday's report will whittle down the wide-ranging ideas set out in an "issues paper" published by the commission in September and tackle structural changes, the new forms of loss-absorbing capital as well as the competition issues. It could also raise the possibility of a full-scale competition investigation.

Barclays faces potential changes as the commission is expected to suggest capital is ring-fenced rather than allowed to swill around an entire bank supporting high street business and its Barclays Capital investment bank. RBS will be affected by such ideas but also by any proposals to inject competition into the high street ? which will most affect Lloyds.

Lloyds, which must already sell 600 branches to appease the EU, has hired consultants McKinsey to help with any restructuring demanded by the report.

Oakeshott said: "Barclays is the biggest risk for the British economy because they are openly trying to build the biggest investment bank in the world on the back of a taxpayer guarantee. The right solution is for Barclays to demerge so shareholders get one share in Barclays Bank and one share in Barclays Capital. RBS must also spin off or sell its investment bank."

Vickers has stepped back from the most radical break-up options but said in January that he wanted to know "whether, and if so how" structural reforms could work and also set out ideas for subsidiarisation ? where capital is ring-fenced either around business lines, geographic areas or operations such as cash machines.

Any reform is not expected to take place until 2012, after a cabinet committee chaired by Osborne considers the final report ? which is due in September.

Industry leaders were urging the coalition to consider the impact that any overhaul to banks might have on the economy. John Cridland, CBI director-general, said: "To achieve economic recovery and growth the UK needs a strong banking sector that can provide credit and other essential financial products to businesses. Banking reforms must focus on building a stable and competitive sector for the future, free from taxpayer support.".

Jill Treanor

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