2.22pm: The bosses of Britain's four biggest banks are being hauled before the Treasury select committee this afternoon to discuss the proposals put forward by the independent commission on banking (ICB), chaired by Sir John Vickers.

First up at 2.30pm are Stephen Hester, chief executive of bailed out Royal Bank of Scotland, who will sit alongside Douglas Flint, the chairman of HSBC, which was not bailed out. At 4pm Bob Diamond, chief executive of Barclays, and Stephen Hester, chief executive of Royal Bank of Scotland, more than 80% owned by the taxpayer, will take their

seats.

Hester is the longest serving of the four, having been parachuted in to replace Sir Fred Goodwin during the October 2008 bailout. Flint only became chairman of HSBC six months ago after a messy boardroom row elevated him from finance director, while Diamond stepped up from running the Barclays Capital investment banking arm at the start of

the year. Portuguese-born António Horta-Osório is the newest, having taken the helm of Lloyds at the start of March after being bought out of the UK arm of Santander, where many had thought he stood a chance of one day taking the top job.

None of them are keen on the ICB and the team run by Vickers, who wants to ring-fence the retail assets from investment banking assets. Horta-Osório is also far from impressed about the proposal that the bank sell of more than the 600 branches that the EU is already demanding. The branches being put on the block are now emerging and range from Cheltenham & Gloucester branches as far afield as Aberdeen and Torquay as well as Lloyds TSB Scotland branches.

2.31pm: Treasury select committees have a pretty good track record for tripping up bank bosses.

Ian Harley, who used to run Abbey National before it was taken over by Santander, admitted to one committee that "only with calculus could credit card interest rates be compared to choose the best card". Matt Barrett, when he was Barclays boss in 2003, admitted he did not use his or anyone else's plastic to borrow money "because it's too expensive" and had been urging his four children not to rack up debts on their cards either.

More recently, Bob Diamond, who ran the investment banking arm Barclays Capital in Barrett's day, told the committee the period for remorse was over - which was not well received.

Horta-Osório's predecessor Eric Daniels had his moment of difficulty in 2009 when he described is £1m salary as "relatively modest".

Link here to the members of the committee, which is chaired by the Conservative MP Andrew Tyrie.

2.49pm: The Thatcher room is filing up. Hester sits first, now Flint.

Tyrie is off, saying he wants a "public debate" on Vickers. He starts off with Flint, who has made proposals about how the ring fencing of retail assets could work. Is some sort of ring fence required? "I think it is required," says Flint, because it would help to maintain the flow of credit that dried up during the banking crisis. "It was tragic," he says. "If I were a policy maker I would seek to set aside the funding capacity from the intra-financial sector trading activity".

HSBC has submitted a three page note to the committee on how ring-fencing would work, and it will be published shortly, Tyrie says.

2.50pm: Complex question now about how derivatives should be treated. Flint, a former finance director, is getting intricate too. Flint is putting forward the argument that banks need to be able to include derivatives in the ring fenced back to price interest risk. It's being likened to

a "building society".

Hester is now being asked about the ring fence. "There are not black and white answers," he says.

2.57pm: Flint gave a pretty straightforward answer although Hester is being much more long-winded. "In the ring-fence part of what they are saying there are risks that need to be addressed," Hester said. But Tyrie cuts him off to pull him back to answer: are you against a ring-fence? "Creating a ring-fence increases some of the systemic risk and decreases the ability of banks to withstand the risk and has significant costs," said Hester.

"It is our belief that it would be hard to create a ring-fence that improves upon the risk cost balance the commission is supporting," he said. Hester is arguing that the losses in the system have been through regular lending not complex derivatives so a ring-fence concentrates risk.

Early disagreement among the bankers then.

2.58pm: Hester is arguing that the City will know if bank reforms have worked in a few years' time if ratings agencies stop trying to include government support into the banking sector. "One of the measures of whether they have succeeded in making banks stand on their own two feet

is that the rating agencies do not ascribe rating for sovereign support," said Hester.

David Ruffley, Conservative, is asking questions now, and asking about the cost of the subsidiary from the taxpayer for the British banking sector. Hester says there is no agreement on the estimates and does not give a number. Oxera says its £10bn a year, as quoted in the interim ICB report and now being thrown at Hester by Ruffley. "Let's try and make it zero," says Hester.

3.01pm: Ruffley wants to know what Hester and RBS support in the Vickers interim report. Hester's retort? Strong capitalisation for banks, stronger liquidity as well as resolution powers for the authorities to take back parts of banks and bail-in powers, where more capital can be

put in without taxpayer money.

Ruffley says what is the government support for RBS. "RBS would have gone into liquidation without government support," says Hester, who was appointed just as the bailout was happening in October 2008. Some £45bn has been used to buy shares, by the way, while the asset protection scheme insures the bank's most troublesome assets. Ruffley's questions are more about guarantees in the money markets, and he now wants to know if they have helped feed through into remuneration.

3.09pm: So in answering the first pay question, Hester said: "To the extent able to carry less capital than in the past, that implicit subsidy could have fed through ... to bonuses". He cites better loan rates and higher employment too, as benefiting from the support of taxpayers in

the markets.

Ruffley doesn't labour the point.

Hester is citing Bradford & Bingley as an early example of breaking up a bank. The best bits - the branches and deposits - were sold to Santander at the end of September 2008 while the bad mortgages went to the taxpayer and have now been united with the "bad" parts of Northern Rock.

3.15pm: Andrea Leadsom, another Conservative and one-time banker, is asking the questions now. She is talking to Flint, and asking him whether a review of the banks' ratings by the agencies is a good thing. She is referring to a decision by Moody's last month to put Lloyds, Royal Bank of Scotland and Santander UK on review for possible credit rating downgrades, saying that there will be no taxpayer-funded bailouts in the future. Flint says it's a lagging indicator.

Now is she asking: are the agencies wrong then? "They are just stating the obvious," says Flint, as agencies factor in an expectation that governments would bail out their banks. Flint says the markets make a judgment about the possibility of default and bailout, which in turn feeds through to the rates bank charge each other to borrow - known as Libor.

And the first question on competition. Are you too big to fail? she asks. Flint, who runs one of the biggest banks in the world and the biggest in the UK, says it's easy for financial institutions to enter the market and compete on retail deposits and such like but harder on SME and business banking. "Virtually impossible" to compete for large deposits, such as from a house sale or pension, because wealthy investors will pick the most robust institutions. "I think there will be depositor preference for those institutions with the strongest balance sheets," said Flint, talking about the "brand effect".

3.22pm: Leadsom is asking Hester if it would be good idea to break up RBS. He says systemic risk is not about institutions but about how risk concentration is spread - citing the savings and loan crisis in the US, where lots of institutions all faced the same problems. Spanish cajas are in the same situation - none of them are big, but they are largely concentrated on the same risks, he says. "Really [it's] a red herring to look at the size of one institution to look at risk in the system," he says.

On deposits, Hester says that because people are encouraged to think there is government support, it means consumers and small businesses can put their deposits in an Iceland bank and know their money is safe.

3.25pm: Now she's asking Flint if RBS should be broken up and more of Lloyds sold off. (The Vickers banking commission has suggested that Lloyds should sell more than the 600 branches the EU has ordered it to as a consequence of receiving state aid.) He essentially says no. "I don't think for the consumer it would make much of a difference," said Flint.

First Labour MP now – George Mudie. Does ring-fencing prevent money moving from retail to the investment side of the bank? "The ring-fenced bank has to be broad in its scope...," says Flint. "If you go down a ring-fencing route, you have to go with what is the best model to preserve the aggregate quantum of credit [to the economy]," he adds. It's not entirely clear that he's answered Mudie's question, however.

3.27pm: Hester is being asked what the cost would be for RBS if ring-fencing happened. Hester doesn't answer directly, but says he can't give a single number. Tyrie is asking if RBS can publish the numbers that RBS is working on. Hester warns they are "price sensitive".

Conservative MP Michael Fallon now.

3.29pm: Flint is explaining that systemic risk doesn't just come from retail deposits and argues that a broader ring-fenced bank is needed than the one proposed by the Vickers commission. The MPs and Flint have an advantage to anyone watching the hearing as they have the three-page HSBC submission that contains this HSBC version of ring-fencing. Fallon is describing it as "a ring-fence with holes in it".

3.32pm: Fallon is now asking what the difference is between the Vickers and HSBC proposals. Flint is making the point that Vickers hadn't spelt out how ring-fencing would work. The HSBC version contains "certain inefficiencies" as new employment contracts might be needed and there would be a more complex administrative structure if banks were ring-fenced.

3.41pm: Labour's John Mann now. Not sure what's he asked exactly, but Hester is saying that "everyone agrees there should be change". Mann is quoting Flint, saying banking should be "predictable". How can the taxpayer avoid picking up the cost of an investment bank? Flint says "you can never say never", but that the chances have reduced.

Mann is asking about the lack of competition in investment banking, with them all jumping into fund that takeover of Cadbury or float Glencore. Vickers does not really tackle this, says Mann, although Flint insists that he can't agree that there isn't competition in investment banking – or that it does not create value for the economy.

Mann says the constant turnover of buyouts just creates fees for lawyers and investment banks. He is now turning on Tyrie, who is asking him to move on. "You don't like my questions, chairman," says Mann.

Flint says investment banks won't be bailed out going forward. "I agree," says Hester.

3.51pm: Stewart Hosie is asking questions now. Straight into capital ratios and return on equity for banks, which has become more of a problem since banks have been required to hold more capital since the financial crisis. Flint says banks are now holding three or four times what they used to. On a 10% equity tier one ratio, HSBC can make a return on equity of 15% - compared with 9% in 2010 when the bank did not make enough money to cover its cost of capital. HSBC spent an entire day last month spelling out how it intends to do this. Flint says a 10% capital ratio will become a "minimum figure". [RBS's had eroded to 2%-ish after buying ABN Amro just as the credit crunch was beginning].

Flint is now listing all the changes the industry has made since the crisis - saying he wants a minute. He's taking longer and Tyrie is now telling him to get a move on. Flint's point is that the questions about reform should more than just about capital.

Hosie is asking what is a safe ratio for banks. "If we go much beyond 10%... I think we risk costs to the economy... because it will be just about impossible to beat our costs of equity," Flint says. He explains HSBC's capital base is is £140bn so each time regulators hike capital requirements it takes "hundred of billions of capacity out of lending".

4.09pm: Mark Garnier is getting his chance to ask questions now and talking about the idea that regulators have of designating some institutions as systemically important – and therefore make them hold more capital. HSBC is likely to be one and Flint has argued this could actually end up being an advantage.

Detailed questions about cocos – contingent convertible debt that converts into regulatory capital in times of crisis and the new idea for helping avoid taxpayers having to step in.

Liberal Democrat John Thurso is on now, and referring to evidence given yesterday by Michael Cohrs, former Deutsche Bank banker, who said that he once tried to break up a bank for a client and failed to find a way to do it. Flint is agreeing it is "incredibly onerous and practically very difficult".

Thurso asking what the impact would be on RBS of ring-fencing. "It would reduce the potential value, many of those fears are in the share price today," says Hester. "I think if we go that route there will be greater costs and they will be divided between shareholders, customers and the economy as a whole."

Hester admits he has discussed the subject with UK Financial Investments, which looks after the £45bn invested in the bank on behalf of the taxpayer. This is a key point that the banks are keen to get across to the politicians. UKFI has previously told the committee it was concerned about the impact of the value of bailed-out banks if Vickers was too radical.

On a question about the culture of banks, Hester says: "It's not clear how you legislate for culture... I don't know how you write a rule for that".

4.16pm: Conservative Jesse Norman is asking about exposure of RBS to Ireland, where the bailed-out bank owns the third largest bank - Ulster Bank. Ireland represents 70% of RBS's impairments but 4% of lending, but Hester says: "We are getting to the peak in impairments".

On a scale of one to 10, before the crash, how would he rate corporate governance? Hester isn't keen to answer but says it was not about the "formalities of governance" but more about judgments. The FSA is producing a report on the events leading up to the bailout and Hester is saying a report "should be given an airing". (The Treasury select committee is paying a key role is trying to get this report published, although it not expected to be

produced until the end of the year.)

Norman wants to know how much of profits before tax is used to pay bonuses. In the investment bank it is higher than 25% but lower across the entire bank, Hester says. Norman is pressing on whether bonuses are benefiting from taxpayer subsidies. Hester acknowledges they have done but also points to "lending at razor-thin margins" so that mortgage customers benefited too.

4.17pm: Tyrie is saying there will be a break of 15 minutes before Bob Diamond of Barclays and António Horta-Osório of Lloyds appear, but first asks Hester if he will spell out what RBS will lose if it is broken up. Hester is again not being specific.

Quick break coming up now.

4.35pm: A quick glance at HSBC's proposal for ring-fencing suggests it's all about using accounting rules known as IFRS9 to decide which assets should be held in the ring-fenced bank. HSBC argues that this allows the ring-fenced bank to hold both retail and corporate deposits as well as the corresponding loans (which banks had been concerned would be forced into the other bit of the bank under ring-fencing). HSBC declares that its idea would "be a separation closer to a Glass-Steagall type of basis", referring to the now repealed US ring-fencing legislation.

"This would have certain inefficiencies but would be much preferable to a structure that risked separating funding from lending; in substance therefore the proposal outlined herein may meet the policy objectives set out by the independent commission on banking," HSBC concludes in its submission to the committee.

4.41pm: So: Tyrie is kicking off with Horta-Osório of Lloyds. Do you agree that banking receives a subsidy? He is saying yes, in a long-winded way.

Now Tyrie is asking Bob Diamond of Barclays. "I wouldn't call it a subsidy," said Diamond. "The phrase I tend to use is implied government guarantee. Unquestionably there was an implied government guarantee during the crisis."

Horta-Osório is being asked if this can be transferred to an investment bank from a retail bank. "When investment banking activities are part of a universal bank they benefit from a reduced cost of funding," says Horta-Osório. "It is possible the investment banking costs do not reflect the risks in the business."

Diamond doesn't agree! He insists retail deposits do not fund his investment bank, Barclays Capital, which he ran until the start of the year.

4.49pm: Tyrie is asking: would a ring-fence help taxpayers? "I do think the main advantage is to protect key economic functions... and to reduce the complexity and interconnectiveness of the bank," says Horta-Osório. The Portuguese-born banker makes the caveat that it is "very, very important to consider where to place the limits". The industry needs a long implementation period too, he adds.

Tyrie asks Diamond if ring-fencing is a "crazy idea" if there is not cross-subsidy between the retail bank and the investment bank. Diamond embarks on a long answer that concludes that so-called operational subsidiarisation works. "Our goals are exactly the same," Diamond says, explaining that Barclays believes depositors should be protected. This is an approach of separation that excludes capital but deals with operations such as branches. Can he envisage a ring-fence which could be a benefit? "It's not the best, but we do think there is a way to make it work," says Diamond.

Michael Fallon is asking questions now about the further divestment of branches demanded of Lloyds by the Vickers commission. Horta-Osório says there is no justification for it and that it is "against the interests of our customers... including the taxpayer". "We are engaging with the commission, it is still early days," he says.

5.00pm: Horta-Osório is being pressed on why the 600-odd branches being sold will create a new competitor and why Lloyds is accusing Vickers of inconsistencies in its treatment of Lloyds and RBS. Vickers regarded the 318 RBS branches sold to Santander (Horta-Osório's old shop) as a fait accompli. Horta-Osório is stressing that he has not been told the number of branches that Vickers has in mind for Lloyds. "We are engaging with ICB [the independent commission on banking]," Horta-Osório keeps saying. "I repeat they have not told us of branches or liabilities or assets."

Tyrie is asking if sales particulars are going out for the 600 branches that the EU has mandated Lloyds should sell. Horta-Osório confirms that it has started. The integration of Lloyds and HBOS will be completed by the summer to release resources to deal with the sale.

"We are sending out the memorandum this week," he says. A teaser has been sent out and his aim is to have "serious indicative offers by the end of July".

Tyrie asks if this is, in effect, intended to present Vickers with another fait accompli (ie to make it difficult for him to demand more branches are sold). No, says Horta-Osório.

5.05pm: Horta-Osório is suggesting that banks should produce information that allows customers to see clearly how much charges differ between banks. And, he says, the industry can reach a deal within two years to make it easier for customers to switch accounts.

Diamond is now being asked if Barclays agrees on the ideas to make it easier to move accounts and appears to be in agreement to improve transparency.

David Ruffley gets to ask the questions now, asking about bank funding again and the cheapening of funding by £10bn. Diamond admits he was watching the session before and says its hard to "put a pin in this". The Barclays boss wants to get rid of the subsidy. "Strong banks want strong regulation," Diamond says. He uses this line a lot.

5.07pm: "No bank should be too big to fail," Diamond goes on, wheeling out the lines about strong banks being good for the economy. "We are way down the road with the FSA having Barclays fit for purpose...," he says, explaining that Barclays has spent £30m this year getting technology together to allow the retail arm to keep operating if the bank runs into

trouble.

He is referring to the talks the FSA is having on resolution and recovery plans for banks, known as "living wills". Diamond says that if there is extreme ring-fencing – complete separation of wholesale and retail banking – there will be an expectation of a government guarantee for retail deposits.

5.16pm: Diamond is confident the reforms being discussed will end the "too big to fail" problem: "It's important banks are allowed to fail... we want failure without the systemic risk, spilling off into taxpayer subsidies or into turmoil in the financial markets".

Tyrie says if Lloyds and RBS had gone down, Barclays would have been next in line. "I don't mean to sound anything but grateful...," Diamond begins before Tyrie cuts him off. Diamond says Lloyds and RBS could not fund themselves in the markets; Barclays saw an influx in deposits and was able to raise funds in the Middle East. Tyrie is asking him why he is grateful, then. The conversation wanders around a bit. "Barclays was a stabilising force," Diamond insists.

George Mudie kicks off by saying Barclays was lucky. Diamond does not respond.

5.23pm: Diamond tells Mudie – who favours total separation – that Barclays is working on the basis that Vickers will require some sort of ring-fencing. Mudie says Barclays is producing questions and objections to ring-fencing, in contrast to HSBC. Diamond says he "appreciates that the full break-up is off the table" and having "good engagement" with Vickers. Mudie says Vickers told him that he hadn't taken full separation off the table.

The resolution talks with the FSA are intended to ensure that the retail arm of Barclays can keep operating, and if necessary, close down other bits, says Diamond. He also talks about cocos - the contingent capital that kicks in if capital ratios fall too low. He says he does not want to be in a position where the bank fails, when Mudie asks him if he is complacent. "From a regulatory issue, [too big to fail] is the biggest single issue," he says.

5.36pm: Diamond is being asked specific questions about how capital charges will affect Barclays and how cocos would work. He is getting into this now. There two kinds: the Credit Suisse idea where below some level of capital, 7%, that bond converts into equity; and the other, preferred by Diamond, where the money becomes totally loss-absorbing and doesn't convert into equity.

5.39pm: The discussion with Conservative MP Mark Garnier is continuing on cocos. Horta-Osório is being asked if he would put Lloyds money in Barclays cocos. He isn't answering directly but says that cocos are only part of the answer - they need strong supervision, higher capital ratios. Horta-Osório argues that capital requirements could fall if banks had resolution and recovery plans that worked.

Stewart Hosie is asking Diamond about the costs to the bank if capital ratios were 10% and pushed higher. "We are carrying more capital than hopefully we need when all the plans are put in place," Diamond says, adding that the bank has purposely overcapitalised.

Prior to the crisis, UK banks had about £180bn in equity; £150bn was put in during the crisis; while Basel 3, the new capital rules, will push it up to £500bn, Diamond is saying. His point is banks are holding more capital even though their risks have fallen.

Diamond says he hopes capital requirements will fall. He is talking about Barclays wanting to be a growth bank, like the government. "I do worry we are making the requirements too high," he says. Banks have gone from 2% capital ratios in 1970s to 14%. "In the UK we have to ask what is the aggregate impact is," says Diamond. Asked to elaborate, he

says: "You see a complete lack of non-UK banks lending. Lloyds and Barclays are working hard to pick up [where] the foreign based banks pulled their lending out".

Horta-Osório is also agreeing that capital ratios are too high.

5.41pm: Barclays expects big bond investors like Pimco to buy cocos rather than rival banks. "We think the market is huge," said Diamond.

Hosie goes back to the implicit subsidy question and asks Diamond if Barclays used the Special Liquidity Scheme, set up by the Bank of England to help banks during the crisis. Diamond says yes.

John Thurso gets the floor now. Is there an implied trade-off between financial stability and growth? he asks. "I am prepared we should be put through the wringer on this. We can have a plan in place between September and March this year to really be stress-tested," Diamond

says. It's a big statement.

6.01pm: Jesse Norman is asking Horta-Osório how much of a mess Lloyds is still in. "I can see some very significant potential in this bank," he replies. "Very important iconic brands. But I have to deal with important problems," he adds, referring to payment protection insurance – where the bank has made a £3.2bn provision – and the losses in Ireland. A strategic review on 30 June will be "evolutionary not revolutionary".

He wants to revive the Halifax brand to compete with building societies. "We are resuscitating it and making it a challenger".

He is also asked about corporate governance, as Hester was, and replies that he is happy with the management structures. Norman is bringing up Paul Moore, who raised concerns about risk management inside HBOS. When Moore's concerns were raised at a previous select committee hearing, former HBOS chairman Sir James Crosby had to resign from the board of the Financial Services Authority in February 2009.

6.04pm: John Mann now. Says Lloyds is being more brutal that its competitors towards small and medium-sized enterprises (SMEs) but Horta-Osório says there is no evidence of this. He says he has detached the SME business from the corporate business and it now reports directly to him. Vince Cable told the Business, Innovation and Skills select committee earlier that Lloyds was now discussing SME lending at board level every month.

Mann is addressing Diamond, saying there needs to be more transparency about risks. Diamond says Barclays' mantra is "lives made easier" and transparency and clarity and understanding of risk is important. Diamond says the bank lent £9.9bn in the UK in the first three months but Mann wants to know if higher capital will affect this. Diamond says the impact is the cost of borrowing and that he personally is reviewing cases where customers are offered loans and then turn them down.

6.13pm: "If rates do rise I do worry about credit spreads," said Diamond.

A quick insight to the upcoming strategic review from Horta-Osorio: he says Lloyds has to deleverage from non-core areas – international businesses, for instance. "We want to build a great bank for households and SMEs," says Horta-Osório.

Andy Love says it's not clear that Project Merlin targets are being met and wants to know what efforts will be made to meet the targets. Diamond first: "Keep working harder," the Barclays boss says. He says Naguib Kheraj, former finance director who has just rejoined the bank, will be meeting more customers. He says the bank needs to look at pricing of loans.

Horta-Osorio? He stresses Lloyds is lending more than the wider market.

George Mudie can't understand why Diamond doesn't want to make ring-fencing practical. Diamond says he is assuming there is going to be some sort of ring-fencing. "We are

working very closely with them and what the best sort of ring-fencing would be," says Diamond.

Tyrie, rounding up the session and drawing it to a conclusion, argues that there should be a high level of public engagement so there is "buy in" to whatever is proposed in September by Vickers and his colleagues on the independent banking commission.

And that's it! The session's over.