Sunday, July 18, 1999 Published at 10:13 GMT 11:13 UK
Business: The Economy
Banking under scrutiny
Are banks making excess profits?
The UK government could be on a collision course with the banking sector.
The Cruikshank report, which will be published this week, is likely to call for major shake-up of the ways that banks do business on the country's High Streets.
But Mr Cruikshank is believed to have widened the inquiry to include the whole issue of bank charges and cross-subsidies, including passing on interest rate cuts and charges for transferring money.
The banking industry, which is expected to report record profits in the next few weeks, is warning that the recommendations could lead to higher banking charges for personal customers.
Mr Cruikshank is believed to have discovered that banks subsidise their retail customers through higher business banking charges.
And he is likely to investigate the highly profitable mortgage lending business, putting pressure on lenders to pass lower rates more quickly on to the consumer.
Mr Cruikshank is also likely to focus on banking regulation, particularly now that banks try to sell other products to their customers.
He is believed to have already talked to the UK's regulatory agency, the Financial Services Authority, about tougher regulation for banks, including an obligation to consider competition issues.
Profits under scrutiny
The UK banking sector is expected to reveal total profits of around £8.5bn this year.
James Johnson, banking analyst at Credit Lyonnais, said UK banks are delivering returns of 25% - 30%, a tidy sum when looking at the cost of capital averaging at 10-11%.
Mr Johnson believes that the Cruikshank report could conclude "that levels of profitability are far higher than is economically justified".
Profits have been boosted by the increase in mortgage lending and house prices, with retail banks like Lloyds TSB and Halifax doing best.
But the wholesale money markets have also recovered from the world financial crisis.
Bank shares have risen sharply in the last few months.
And takeover fever is rife in the sector, after the failure of Alliance & Leicester and Barclays to find merger partners.
Profits economically justified?
Mr Cruickshank's report could revive pressure in the Labour Party for an excess profits tax on banks, although both Mr Cruickshank and the Chancellor, Gordon Brown, have rejected that approach.
"There's a fair chance he (Mr Cruikshank) is going to conclude that levels of profitability are far higher than is economically justified," said James Johnson of Credit Lyonnais.
However, many banking analysts believe that Mr Cruickshank will stop short of specific measures to curb "excessive" profits.
"Our sense is that recent market fears over a material impact on banking profitability arising from Cruickshank remain overdone," analysts at Merrill Lynch said in a note.
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