Bank of England governor Mark Carney has rejected Labour proposals to break up the big five banks claiming it would not boost competition and could lead to financial instability.
Labour is proposing capping the size of banks based on their market share. The big five – Lloyds Banking Group, Royal Bank of Scotland, Santander, Barclays and HSBC – currently have a 90 per cent stranglehold on the current account market.
On Friday, Labour leader Ed Miliband is expected to flesh out details in a major speech to boost banking competition by promoting challenger banks and curbing larger ones.
Speaking to the Treasury select committee about last year’s Financial Stability report yesterday, Carney said capping banks’ market share would not boost competition and could harm stability.
He said: “Just breaking up an institution does not necessarily create a viable or more intensive competitive structure. It’s not just about one aspect of the market as you need to look at the entire business models and risk profiles.”
In the United States banks are not allowed to hold more than 10 per cent market share on retail deposits but Carney said the cap actually creates more risk.
He said: “The rule in and of itself did not prevent the creation of large, systemic financial institutions. One could argue that by limiting retail funding it encouraged more wholesale funding which expanded balance sheets and created risks.”
Carney said the EU bank bonus cap, which will impose a bonus cap of 100 per cent of senior banker salaries from next year, is wrong and would simply cause banks to raise basic pay.
Labour is calling on the Treasury to impose the bonus cap on RBS this year with Labour leader Ed Miliband claiming a £1m is “quite enough” for someone earning a £1m salary.
At the TSC, Carney revealed the PRA will launch a six month consultation on bank bonus rules in April focusing on longer payment deferrals and greater clawback powers.
He said: “The PRA will consult this year on lengthening the deferral process beyond five years and also to ensure we can not only clawback from existing compensation but past compensation too.”
The parliamentary commission on banking standard recommended 10 year deferrals for senior bankers but the Treasury rejected any review of remuneration at the time.