A carve-up of big banks is firmly on the agenda, the chairman of
Britain's Independent Commission on Banking made clear today, even as he
ruled out the most radical solutions designed to avoid the necessity of
another multibillion-pound bailout of the financial sector.

In
only his second public statement since being appointed by the government
last summer to review the structure of the banking industry, the former
Bank of England economist Sir John Vickers also spelt out the need for
holders of bank bonds to suffer losses when banks run into difficulty,
and his commission's view that the new capital adequacy plans for the
financial sector – Basel III – do not go far enough.

Vickers's
much-anticipated remarks came amid an acceleration in talks between
high street banks and the government to commit to lending between £160bn
and £180bn to businesses this year. Discussions about disclosing more
information on top pay are also continuing. The aim is to conclude
negotiations with the banks before next week's high-level summit of
business leaders and economic policymakers in Davos.

Vickers told
his audience today that he wanted to consider "whether, and if so how"
structural reforms to the banking industry could work alongside existing
plans to bolster bank capital and create "recovery and resolution
plans" to cope with crises. He indicated that the new rules from Basel,
which could require banks to hold three times as much capital as they
presently do, will still not be sufficient to ensure banks hold reserves
that can be used as a cushion in the event of collapse.

"If,
then, one takes the view that the loss-absorbing capacity of banks needs
to be massively enhanced – and beyond the prospective requirements of
Basel III in the case of systemically important institutions – there are
dilemmas about how best to achieve that," Vickers, a former head of the
Office of Fair Trading, told an audience at London Business School.

He
ruled out ideas for "narrow" banking – where banks act purely as
low-risk, deposit-taking institutions – or other forms of "limited
purpose banking". But he explored the idea that so-called "universal"
banks, which combine high street businesses and investment-banking
operations, might be required to ring-fence certain riskier operations
from their consumer businesses – a process known as "subsidiarisation".

"Universal
banking has the advantage that a sufficiently profitable or
well-capitalised investment banking operation may be able to cover
losses in retail banking," said Vickers. "But it has the disadvantage
that unsuccessful investment banking may bring down the universal bank,
including the retail bank."

He floated the possibility that the
riskier operations of banks could be required to hold more capital
rather than being split off from the high street bank completely. But he
rejected the characterisation of investment banking operations as
"casinos": "Retail banking necessarily carries risk, notably via
exposure to residential and commercial property markets. Thus the
popular 'utility/casino' distinction between types of banking activity
seems more catchy than helpful."

Any attempt to split up sprawling
banking institutions would meet fierce resistance from the industry.
Peter Sands, chief executive of Standard Chartered, warned this weekend
that breaking up the banks would be "very damaging".

Lord
Oakeshott, a Liberal Democrat Treasury spokesman, said: "I have pinched
myself in recent weeks and asked who is really running the country – the
banks or the elected government?"