The Independent Commission on Banking, chaired by Sir John Vickers, published its long awaited report yesterday. Amongst the broader recommendations for better ‘macro-prudential’ policy to ensure fewer and smaller shocks to the system in the event of any future crisis, were proposals on reform options to bring greater competition to the retail banking sector. The conclusions fall some way short for those hoping for a full unwind of the Lloyds/HBOS merger, whilst Lloyds themselves have reacted angrily to the suggestion that they should sell many more branches than the 600 agreed with the European Commission.

It all looked so different back in September 2008 when an apparently healthy Lloyds TSB appeared as a white knight ready to rescue HBOS from imminent collapse. Gordon Brown and the then Labour Government jumped at the chance of avoiding a costly public intervention or a repeat of the run on Northern Rock the previous year. The Government removed any possible competition hurdle to the deal by creating a new public interest exception for deals designed to safeguard the stability of the UK financial system and the transaction was subsequently cleared in spite of the OFT’s concerns on purely competition grounds.

All may have been well were it not for the subsequent need for the newly formed Lloyds Banking Group to seek capital from the Treasury, resulting in the Government taking a minority interest of around 40%. This intervention offered a chink of light to the competition authorities, giving as it did jurisdiction to the European Commission to review the arrangements under the state aid rules. The upshot of that review was a requirement that Lloyds sell at least 600 branches and with it a sizeable chunk of the group’s mortgage book and share of the personal current account market.

Yesterday’s report significantly increases the regulatory cost of riding to HBOS’ rescue. It appears that the opportunist play for an unmatchable competitive advantage in the market is approaching the buffers – whilst Lloyds will retain leadership in a number of key areas (including the crucial personal current account market), it will have paid a very heavy price through the loss of its independence, perhaps as many as 1,000 branches and the TSB brand.