-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
By George Hay
LONDON, Dec 24 (Reuters Breakingviews) - The UK's banking commission won't be a pushover. The independent body, set up to study the structure and competitiveness of UK banks in the wake of the financial crisis, delivers its final report in September. Few expect it to go for the nuclear option of formally breaking up investment and retail banks. But that doesn't mean the likes of Barclays (BARC.L) and Lloyds Banking Group (LLOY.L) can relax.
There are good reasons to reject a reprise of Glass-Steagall, the depression-era U.S. legislation that barred commercial banks from the securities business. Two of the highest-profile banking collapses -- Northern Rock and Lehman Brothers -- were pure retail and investment banks, respectively. Demanding a break-up would also put the UK at odds with both the United States and the rest of Europe. Big lenders might move their headquarters overseas to escape the rules.
But the UK commission's four members -- Martin Taylor, Claire Spottiswoode, Bill Winters and Martin Wolf -- could still recommend significant changes. One option is to stop investment arms benefiting from cheaper funding because they are tacked onto retail banks that governments are obliged to bail out.
Making banks like Barclays house their investment arms in separate subsidiaries would allow regulators to make sure risky trading activities were properly capitalised. It would also make it easier to ring-fence those businesses in a collapse. That, in turn, would push up funding costs, and might prompt some banks to decide the business was not worth bothering with.
Yet tinkering with bank structures might not make a big enough political splash for Britain's coalition government. Boosting competition might prove a quicker win.
This is worrying for Lloyds. After rescuing HBOS during the crisis, it controls 20 to 25 percent of UK mortgages and current accounts. Cutting the swollen lender in half would not only shake up the oligopoly in UK banking, it would also effectively reverse a deal that was very publicly brokered by Gordon Brown, the former prime minister.
The Commission will want to make sure that its recommendations are accepted by politicians and can actually be implemented. But banks hoping that this will encourage timidity could be indulging in dangerously wishful thinking.
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