Break-up of banks urged

BA NKS SHOULD be broken up to help stimulate competition in the financial sector and cut the costs of services to customers, a think-tank said today.

The Institute for Public Policy Research (IPPR) accused the Government of being “too timid” and said a split of retail and investment banks should be forced.

It argued that this would make the system safer and lessen the chances of the taxpayer having to pump funds into banks in the future by ensuring that no bank is “too big to fail” or “too big to bail (out)”.

The Don't Bank on It report said that customers are paying substantial fees and charges because competition has been distorted and regulation has not been effective historically.

It argued that the UK’s large financial sector, relative to other similar economies, is a “source of strength”, but the challenge to policymakers is how to reduce its associated costs without damaging it.

Competition in banking should be increased by making it easier for new players to enter the market, the report argued.

It also suggested that policymakers might have to look at putting greater curbs on mortgage lending to lessen the chances of any return to potentially risky lending.

This could involve setting maximum loan-to-value and loan-to-income ratios on mortgages, the left-of-centre think-tank said.

The report said the Bank of England should be particularly concerned about any institution that records a sharp increase in its share of the mortgage market.

Meanwhile, risk-taking in investment banking should be reduced, with more done to make senior directors and managers liable for financial losses when something goes wrong, the report said.

Tony Dolphin, chief economist at IPPR, said: “The Government is making some progress on tackling the implicit subsidies the rest of the economy provides for the financial sector and on reducing future liabilities for UK taxpayers in the event of a financial crisis.

“It has also taken steps to better protect stakeholders, such as depositors, borrowers, investors and shareholders. But more action is needed in both areas.”

Picture: PA. Flooded gardens in Ironbridge, Shropshire as the River Severn burst its banks yesterday.