September 8, 2010 8:26 pm

Cable weighs ‘crude’ surgery on banks

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Britain’s biggest banks may avoid being split up along “crude” lines, despite fears about their combination of investment and retail banking, Vince Cable, business secretary, has conceded.

Mr Cable is a fierce critic of the way in which banks such as Barclays, RBS and HSBC run what he calls “casino” investment banking operations, underpinned by an implicit taxpayer guarantee of their high-street banking in the UK.

The appointment of Bob Diamond, the Wall Street investment banker, as Barclays’ chief executive has infuriated Mr Cable and reopened the debate about the shape of Britain’s banks. Mr Diamond, head of Barclays Capital, will now take charge of the whole bank, including its retail operations in the UK.

The business secretary said Britain’s “universal” banks had to be made safe, but conceded: “Splitting the banks can mean different things.” He told the BBC that more “subtle” methods – rather that a “crude” separation of in­vestment and retail banking – could work, such as placing “firewalls” between the two arms.

Alistair Darling, the former chancellor, said he heard in these comments “the screeching of brakes, shortly before the execution of a U-turn”, saying Mr Cable had finally realised the folly of breaking up world-class banks.

But the business secretary insists he still wants fundamental reform, and the issue remains a potential ticking bomb under the ruling coalition.

For now, the question of how to make the banks safe is in the hands of the independent Commission on Banking, headed by Sir John Vickers, which will report by next September. Mr Cable hopes it will make “strong recommendations”.

George Osborne, the chancellor, has softened his line on the splitting of banks over the past two years and now takes a less aggressive tone than Mr Cable. At the general election, the Conservatives favoured a UK version of the US “Volcker rule” – restricting banks from proprietary trading on their own account – which may have had only a limited impact on banks such as Barclays.

Mr Diamond’s appointment on Tuesday has raised the political temperature over banking reform at a time when Mr Osborne would rather cool tensions.

The appointment was described by the Treasury and Downing Street as a matter for Barclays’ board. Privately, some officials roll their eyes, saying: “You can’t do anything about it, so just move on.”

But one well-connected Tory MP said: “What does Bob Diamond know about running a retail bank? The board did have a choice – it’s their job to set the direction for the bank.”

The coalition’s top priority for banks is to get them lending again to small businesses. Some of Mr Osborne’s allies are unsure whether Mr Diamond, a successful Wall Street dealmaker, will be fully foc­used on such local issues.

Ministers also fear that Mr Diamond could become the public face of banking excess if the banks pay out big bonuses next February and March. Mr Osborne said this year that the Barclays chief’s remuneration after the financial crisis “beggared belief”.

One government official said: “Bank bonuses aren’t quite the political issue they were 12 months ago.”

That theory will be fully tested in the dark days of the coming winter, as the coalition’s spending cuts begin to feed through into large-scale job losses in the public sector. Anti-banker sentiment, relatively subdued in recent months, could be fuelled by the Liberal Democrats – eager to raise their profile on a popular issue – if the banks do not show bonus restraint.

Mr Osborne’s team recognises the potential trouble.

The chancellor, who im­posed a £2bn bank levy in his June Budget, has no immediate plans to raise the levy or impose a new bonus tax. He hopes the banks will read the political runes and show restraint.

“We are watching what the banks do,” said one aide. Mr Osborne is said to be genuinely open-minded on their future structure.

Sir John Vickers’ commission remains an open-ended threat to the banks, while Mervyn King, Bank of England governor, is a hawkish advocate of reducing the risks posed by “too big to fail” banks.

The banks will have their own powerful advocate inside the coalition. Stephen Green, the chairman of HSBC, will become a trade minister in January, with a key role in considering the future of banking.

He will argue for retaining “universal banks”. But the best advocates for that case are the banks themselves – their record on lending, risk and remuner­ation has seldom been under greater scrutiny.

Additional reporting by Alex Barker and Chris Giles

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