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RBS Boss Opposes Ring-Fencing Bank Divisions

The boss of the taxpayer-backed Royal Bank of Scotland has refused to support proposals to ring-fence different banking operations and warned that the move could create more risk in the industry.

RBS chief executive Stephen Hester was being grilled over plans detailed by the Independent Commission on Banking (ICB) to separate the retail arms of UK banks from the riskier investment banking divisions.

Mr Hester told the Treasury Select Committee he could not give "black and white answers".

When asked if he backed the move, the RBS boss warned: "Creating a ring-fence increases some of the systemic risk and decreases the ability of banks to withstand the risk and has significant costs."

But Mr Hester was joined in giving evidence by HSBC chairman Douglas Flint, who said a ring-fence was required - although he would prefer it if there was not one.

The Government commissioned the ICB report, which will be published in full in September, to review ways of avoiding "too big to fail" banks sparking another credit crisis.

Mr Hester explained there was a moral hazard attached to ring-fencing parts of a bank's business as it could encourage excessive risk taking.

He added that it would need to be tightly focused as it would be a mistake to try to second guess where any losses might arise in the future.

Elsewhere, Mr Hester sought to explain the industry benefits received when the Government provided a guarantee to protect ordinary savers' deposits as part of what is known as the implicit taxpayer subsidy.

The guarantee was used to reduce liability risk and thereby lower its borrowing costs from the money markets.

With the reduced expenditure that the implicit guarantee facility brought, the bank was therefore able to continue paying banker bonuses and lending money out to small borrowers.

Although no money changed hands in the guarantee Mr Hester described the benefits of reduced money market cost as "leakage", of the implicit taxpayer subsidy.

One of the recommendations of the ICB was that Lloyds must sell more than the 620 branches, which it has to under European Union rules, but boss Antonio Horta-Osorio repeated his view to MPs that this would not be in the interests of customers, shareholders or the taxpayer.

Mr Horta-Osorio confirmed that the group would send out the information memorandum for the sale of the branches to interested buyers this week, with serious buyers having until the end of July to lodge their interest.

Discussions are ongoing with the ICB, but he said he had been given no indication of how many additional branches it might have to sell or what assets or liabilities it might have to divest.

He also dismissed concerns from the ICB that the company that buys the branches would be too small to be a serious competitor saying it was similar in size to Abbey when he took over and built it up into Santander UK.

Barclays' boss Bob Diamond added that a ring-fence approach "would not be his first choice" but said the bank was working with the ICB on the assumption that there will be ring-fencing.

Earlier, Business Secretary Vince Cable told MPs the Government is prepared to increase taxation on UK banks if they fail to back small businesses.

Mr Cable was asked to address fears that the UK's top five banks are failing to do enough to meet lending targets as set out under the Project Merlin agreement.

Addressing the Business, Innovation and Skills Committee, Mr Cable said: "The Chancellor and Prime Minster have made it clear that if we don't get results, they have said we should take further action with tax on banks."

Mr Cable acknowledged there was a "serious problem" with lending to small and medium sized enterprises but said there was a "mixture of factors" behind this, including low demand for new lending.

The Project Merlin agreement, unveiled in February, followed protracted talks between the top five banks and the Treasury over key issues such as bonuses and lending.