Proposals for the future of Britain’s banking sector will be sketched out on Monday when the Independent Commission on Banking (ICB) delivers its keenly-awaited interim report.
Speculation has been ramping up in recent days over the Government-appointed watchdog’s plans as it conducts a year-long probe into the sector to promote competition and financial stability.
There have been industry fears of a radical shake-up that could have significant implications for Britain’s major players – from a full-scale break up of Lloyds Banking Group to an industry-wide split of retail and investment banking operations.
But reports point to a more measured approach from the ICB in its spring report.
Industry insiders are said to believe Lloyds may avoid a call for a break-up, despite now accounting for 30% of personal current accounts and 21% of the savings market.
Instead the ICB may suggest changes to boost competition, such as making it easier to switch accounts and making pricing more transparent.
It is also expected to stop short of proposing the most draconian steps to split retail and investment banking operations, although it is still thought to be aiming for a partial separation to protect savings deposits from so-called “casino” banks.
It will not give its final verdict until September, but the spring report is increasingly being seen as key to the commission’s thinking on how to tackle current imbalances in the industry.
The commission was set up last June to conduct a review after the financial crisis drastically altered the industry and highlighted the need to reduce the risk of future bail-outs.
The meltdown left Britain with one of the most highly concentrated retail banking markets in the world, with the top five groups accounting for 85% of UK personal current accounts and 70% of savings accounts.
Of particular concern was Lloyds after its hurried-through rescue of HBOS at the height of the crisis saw it become an unrivalled force in retail banking.
Members of the ICB have already confirmed they would consider breaking-up Lloyds, which is 41% owned by the taxpayer.
It had been thought the ICB could push for the HBOS deal to be unwound, or for it to offload more than the 600 branches being sold-off to appease European competition concerns.
The new chief executive at Lloyds, former Santander UK boss Antonio Horta-Osorio, has recently announced the acceleration of the group’s divestment plans – seen as a tactic to head-off any draconian ICB proposals.
But the commission is expected to veer away from targeting Lloyds in favour of sector-wide changes.
Jonathan Jackson, head of equities at Killik & Co, met recently with the bank and said fears of punitive measures being imposed on Lloyds were subsiding.
“Although some uncertainties still remain regarding the recommendations of the Independent Commission on Banking due next Monday, they are not expected to have a significant impact on Lloyds.”
On structural reforms, banks have been living in fear the commission would recommend completely splitting retail and investment banking – a move that would significantly impact groups such as Barclays, HSBC and Royal Bank of Scotland.
Banks argue that this would push up the cost of loans and banking, as they cross-subsidise between the two operations.
The industry is reportedly estimating an annual cost to banks of as much as £15 billion to £20 billion a year from some of the more drastic restructuring measures.
This could be passed on to consumers in higher borrowing costs, or spell the end of free banking.
However, the final decision will lay with the Treasury, as the ICB has no statutory powers.
The Treasury is expected to receive a copy of the report on Friday, while banks will get to see the document an hour before publication.
Monday’s report is also likely be followed by further intense consultation before final recommendations are made to Chancellor George Osborne in the autumn.