Britain's banks are facing a hard-hitting probe that will examine the break-up of retail and investment banks after the financial crisis forced taxpayers to pour billions of pounds into the sector.
Britain appointed the Independent Commission on Banking (ICB) three months ago — a group of five heavyweight former bankers and other professionals — to assess whether the country's banks are too powerful and how to boost competition.
In its first paper on Friday, the ICB said it would look at separating companies' retail and investment banking divisions and imposing limits on proprietary trading and investing, along with looking at reforming market infrastructure.
"The list is not intended to be exhaustive and ... the commission has not moved towards any particular options at this stage," it said in a statement.
The British Bankers Association welcomed the paper and said there was room for constructive solutions.
The paper came as politicians around the world eye tougher rules for banks, whose overly easy lending practices were blamed for causing the credit crisis.
Despite much strong rhetoric from politicians in recent weeks against investment bankers, many industry members and analysts have said it is unlikely that British banks will ultimately be forced to break up.
Most universal banks proved stronger than many "narrow lenders" with less diversified business models during the crisis, and a full break-up could also prompt leading companies to shift overseas, analysts say.
Shares in the country's major banks were broadly unaffected by the ICB's initial report.
Part-nationalized group Royal Bank of Scotland rose 0.2 percent while fellow part-nationalized bank Lloyds fell 0.4 percent.
"We are continuing to avoid the banking sector due to the uncertainty and volatility in their profits," said Claire Rodrigue, a fund manager at Comgest in Paris.
POLITICIANS CLAMP DOWN ON BANKS
At a time of dramatic change at the helm of the banks, the new heads of HSBC, Barclays and Lloyds may find themselves having to run operations in a far stricter environment than before.
Global regulators this month agreed tougher new capital rules for banks as part of the Basel III regulatory measures, while the chairman of America's Federal Deposit Insurance Corp said regulators may break up large financial companies that fail to co-operate with U.S. reforms to the sector.
U.K. Business Secretary Vince Cable said this week further taxation on banks was possible but HSBC, Barclays and Standard Chartered have all warned they could leave Britain if the regulatory environment gets tougher.
"It doesn't look proscriptive so far in terms of breaking up the banks," said Execution Noble bank analyst Joseph Dickerson.
The commission has until the end of 2011 to report, and analysts have added that the British government is unlikely to sell its stakes in Royal Bank of Scotland and Lloyds until the full outcome of the report is known.
The U.K. government owns around 83 percent of RBS and around 41 percent of Lloyds.
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