Vickers report on banks to be accepted in full - Cable

 

Vince Cable: "We are going to proceed with the separation of the banks"

The government will accept the Vickers report into banking "in full", Business Secretary Vince Cable has told the BBC.

The report, launched in the wake of the financial crisis, recommended separating banks' retail business from their investment business.

Mr Cable said the government would proceed with separating the banks.

But the recommendation about the amount of capital banks should hold has been diluted, the BBC has learned. The chancellor will address MPs on Monday.

George Osborne will give a statement to Parliament after the government publishes its response to the report.

The BBC's Business Editor Robert Peston has learned that reform may not be the 100% as originally billed.

In one key area the banking industry has succeeded in getting the Treasury to water down one of Vickers' recommendations, he said.

This is the proposal that the biggest UK banks should have enough capital plus loans that could be converted into cash to cope with losses equal to one fifth of the size of their total balance sheet.

As Robert Peston understands it, HSBC has successfully argued that it would be disproportionately expensive for it to do this. In HSBC's case they are much bigger outside the UK than inside.

Start Quote

Our banks will in the coming five years be forced to undergo significant financial, cultural and managerial reconstruction”

End Quote Robert Peston BBC Business Editor

If they had to raise up to 20% of their global balance sheet they would have to raise huge amounts of expensive new capital or loans. The Treasury is to soften the blow. It will do this by requiring the big banks to raise capital and loans equivalent to 20% of that part of their balance sheet, which British tax payers would have to support in a crisis.

However, our correspondent said Sir John Vickers and his commissioners had been successful in achieving most of their aims, and the UK's financial system will be overhauled.

"Our banks will in the coming five years be forced to undergo significant financial, cultural and managerial reconstruction."

In the UK, the financial crisis started with Northern Rock being bailed out by the taxpayer, but went on to include both Lloyds and RBS receiving substantial sums of public money.

Chaired by Sir John Vickers, the Independent Commission on Banking was set up by the coalition Government last year to review the financial sector after the crisis.

Analysis

Even though the banks may disagree, it looks as if their expensive and intensive lobbying to get the Vickers report watered down has come to very little. Their only success has been the time frame. Banks will not be forced to partially split their investment banking divisions from their retail or High Street divisions until 2019 at the latest.

But apart from that, banks will have to begin a process to completely rearrange their corporate affairs and raise billions in additional capital, which non-UK based banks will not have to do.

Barclays boss Bob Diamond claims that the reforms will end up costing the entire banking industry up to £7bn. Before we all wipe our crocodile tears away, let's not forget who might ultimately pay for that in higher interest rates and lower borrowing amounts? You and me.

It published its report in September and looked into ways of avoiding such bank failures in the future.

The report said it would "make it easier and less costly to resolve banks that get into trouble".

It recommended that a bank's retail business should be ring-fenced from its investment business, with this and other recommendations being implemented by 2019.

Mr Cable seems to be sticking to this timetable, promising that "primary legislation will be done in this parliament".

He told the The Andrew Marr Show: "Our big banks were at the very centre of the financial crisis, what the Europeans call Anglo-Saxon financial capitalism. It needs reform."

Separate entities

The report recommends that ring-fenced banks should be the only operations granted permission by the UK regulator to provide "mandated services", which include taking deposits from and making loans to individuals and small businesses.

It says that the different arms of banks should be separate legal entities with independent boards.

Another of its recommendations is that banks must have a buffer to absorb the impact of potential losses or future financial crises - of at least 10% of domestic retail assets in top-quality form, such as shares or retained earnings.

That is a stiffer target than the 7% recommended by the international Basel Committee on Banking Supervision.

It also says the biggest banks should go further than this and have a safety cushion of between 17% and 20% of assets, made up of highest-quality assets topped up with bonds that can be easily converted to equity.

The commission also recommends that steps should be taken to make it simpler to switch bank accounts.

The Vickers report wants a free current account redirection service to be formed by September 2013, with an improved system to catch all credits and debits going to a customer's old, closed account, including automated payments on debit cards and direct debits.

 

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  • rate this
    -1

    Comment number 432.

    Ultimately in times of real crisis pressure on one part will be reflected on the other part just as it was with the ERM and will be with the Euro.
    It is easy to say "No more boom and bust" but impossible to ensure that it doesnt happen. Trading will ensure that it does.

  • rate this
    +9

    Comment number 421.

    Too little, too late. The damage caused by un-regulating the financial sector has put the economy in an un-recoverable situation. The only solution left now is to nationalise the banks and force regulation through now.

  • rate this
    +1

    Comment number 215.

    The acid test will be how the rating agencies and other independents like the IMF assess the reforms in terms of how quickly they are implemented, whether no loopholes or exceptions are made to appease the bankers, and how they compare against the Eurozone proposals, which are already falling apart as some members are refusing to agree to the tax harmonisation element.

  • rate this
    +47

    Comment number 74.

    I don't think the proposed reforms go far enough. The banks should be broken up into smaller, more manageable units, any of which can be allowed to fail without bringing the economy crashing down around our ears. Then all we need to do is wait for the US government to follow suit?

  • rate this
    +51

    Comment number 45.

    This has to be welcomed so that it is the government and not the bank which runs the country. The ridiculous scheme of rewarding failure also needs to be tackled in a competent manner. I just can't help think that 2019 is so far away and a lot can happen between now and then...as successive governments come and go...and lobbying groups grow. Yep, I'm a cynic!

 

Comments 5 of 14

 

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