Two senior Scottish bankers said they accepted the need for radical reform of their industry but rejected calls to separate retail from investment banking.

Archie Kane, group executive director of Lloyds Banking Group, and Andrew McLaughlin, chief economist and director of communications at Royal Bank of Scotland, were speaking at a Question Time-style debate in Edinburgh on Monday night.

The public meeting was one of a series organised by the Independent Commission on Banking, a panel formed by the government to consider how to promote financial stability and competition in the sector.

Mr Kane said two of the most prominent victims of the financial crisis, Lehman Brothers and Northern Rock, were respectively
a standalone investment bank and a narrow retail bank. He added: “The banking industry must accept its share of the problems we have all encountered.”

There was a clear trade-off between removing risk from the banking system and the rate of economic growth, he said, and these factors had to be weighed.

Any reforms would have to be comprehensive and take account of the international and regulatory context in which banks had to operate, he added.

Mr McLaughlin said his organisation had become synonymous with financial crisis in the mind of the public. But he went on to claim that RBS’s new management team had launched as radical a restructuring as had been undertaken by any bank in the world.

He said the debate about financial reform was being distorted by concerns about institutions being too big to fail. “It was not just big institutions that failed – it was all manner of institutions that failed,” he said.

Last week Clare Spottiswoode, commission member and a former gas market regulator, said the body might “suggest reversing” the 2009 merger of Lloyds and Halifax/Bank of Scotland, arranged when Edinburgh-based HBOS was on the verge of collapse.

Alistair Darling, the former chancellor and an Edinburgh MP, earlier said Scotland’s economy could face disastrous consequences if the UK’s biggest banks were broken up. Writing in the Scotsman newspaper, Mr Darling
predicted a break-up would prompt the biggest global banks simply to pack up and leave the country.

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