Break up the big banks, says merger mastermind Mathewson

Veteran Scottish banker Sir George Mathewson has called for the break-up of the deal that defined his years of leadership at Royal Bank of Scotland and cemented his position among the doyens of the industry.

Sir George has argued that the government-appointed Independent Commission on Banking (ICB) should "seriously consider" a split of RBS and NatWest into two separate institutions.

He also backed the break-up of the controversially forged HBOS and Lloyds, as well as the further split of HBOS into its historic constituents of Halifax and Bank of Scotland.

Sir George was chief executive of RBS in 1999 when he led the bank into a battle against Bank of Scotland for control of the much larger NatWest. RBS eventually trumped its Scottish rival with a 21 billion bid in early 2000, the largest takeover in UK history.

The bitter struggle set the tone for a round of consolidation across the industry. Among other things, the ICB is now looking at whether the UK's major institutions should be broken up to promote competition in the wake of the banking crisis.

In his submission to the ICB, Sir George described the government-brokered marriage of HBOS and Lloyds in 2008 as "misconceived". Sir George - who joined forces with former Bank of Scotland chief executive Sir Peter Burt in a failed bid to derail the acquisition of HBOS by Lloyds - maintained his stance that the deal should be reversed despite the associated costs.

He then went on to say that a "further consideration" might be to split HBOS, which was formed in 2001 through the merger of Halifax and Bank of Scotland.

"This merger was never satisfactory and its demise could create two separate entities - Halifax (a 'narrow bank') and Bank of Scotland, a full commercial bank genuinely headquartered in Scotland," he said. "Bank of Scotland would then form part of an improved business support structure for Scottish businesses.

"In addition, the Independent Commission should seriously consider requiring RBS to sell off all of its insurance business and to split into two separate banks - which would be RBS and NatWest with RTBS headquartered in Scotland.

"This action along with the split up of Lloyds Banking Group proposed above would lead to significantly improved competition."

Sir Peter Burt also suggested that any break up of the banks should be done so as to retain their ability to offer "a competitive range of services".As such he suggested that de-merging banks such as RBS and NatWest would be a better option than a concern over "casino" banking.

Sir George's call to split Lloyds and RBS follows a similar view from John Fingleton, head of the Office of Fair Trading, who last week said authorities were right to examine splitting them up.

In a speech on Saturday, ICB chairman Sir John Vickers did not explicitly recommend a full break-up of the banks but said the ICB would consider "forms of separation" between their retail and investment banking businesses.

Sir John said companies could consider ring-fencing banks' retail deposits from their investment banking activities and forming separate subsidiaries for these different units. Under this structure, banks would have to allocate specific amounts of capital for these units or for operations in different countries, as Spanish bank Santander does with its British arm.