Osborne confirms banks must ringfence retail banking


George Osborne: "The elements vital for families, businesses and the whole economy will be able to continue without resort to the taxpayer"

Chancellor George Osborne has backed most of the recommendations in the Vickers' banking report, including protecting retail banking from riskier investment activities.

Mr Osborne also backed the suggestion from the Independent Commission on Banking, which said that banks should keep back a bigger cushion of assets.

The changes are designed to avoid a repeat of the 2008 banking crisis.

He also said state-owned RBS would reduce the size of its investment bank.

The reforms to the banking sector mean the deposits and overdrafts of ordinary consumers and small businesses will be handled only by ring-fenced parts of banks, which will not be allowed to embark on risky investment activities.

Mr Osborne said: "Our objective is clear. We want to separate high street banking from investment banking, to protect the British economy, protect British taxpayers and make sure that nothing is too big too fail.

"Second, we will make sure the banks have bigger cushions so they are better able to withstand losses."

The Shadow Chancellor, Ed Balls, broadly welcomed the moves: "We on this side of the House are determined our part in implementing these proposals, as far as possible, in a cross-party spirit. Taxpayers, customers and businesses, angry at banking recklessness which forced a multi-billion pounds bailout, will expect nothing else."

Mr Osborne said the changes would cost the industry £3.5bn to £8bn a year, but he said the costs would be "far outweighed" by the benefit to the economy of avoiding future financial crises.

He said these could reach £9.5bn a year on "modest" assumptions.

Smaller RBS

The Chancellor also announced a major strategy change at Royal Bank of Scotland (RBS), namely a big reduction in the size and scope of its investment bank.

A Treasury source told the BBC that the reconstruction of RBS's investment bank would leave it close to the kind of investment bank once owned by NatWest, one more focused on UK companies.

RBS bought NatWest a decade ago.

Mr Osborne told MPs in the House of Commons that he supported plans by RBS to shrink its investment bank into a business more focused on UK companies.

This is expected to involve a significant retreat from North America, where the bank acquired a big presence when Sir Fred Goodwin was chief executive.


However, BBC business editor Robert Peston said that the reforms implemented by the government are not 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 capital, to cope with losses equal to one-fifth of the size of their total balance sheet.

Robert Peston reported that HSBC had 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.

The Treasury is expected to soften the blow by requiring the big banks to raise capital to support only that part of their balance sheet that 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 would be overhauled.

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

Future crisis

Lydia Prieg, finance researcher at the New Economics Foundation, said the reforms would not protect the taxpayer from any future banking crisis.

"Even an outright separation between retail and investment banking, which is not what we are getting, would leave individual banks with asset ratios equal to approximately 100% of the UK's GDP, ie that are too big to fail.

"Critics will say these reforms already come at too high a price, but even the government's upper estimate £8bn is a drop in the ocean compared to the cost of another banking bailout and still means we subsidise banks by approximately £40bn a year [as a result of their too-big-to-fail status]."

John Longworth, director general of the British Chambers of Commerce (BCC), said the reforms in themselves would not help the wider problem of businesses gaining access to bank lending.

"Businesses still find it difficult to get access to capital, or capital on reasonable terms, in what is a highly risk-averse environment.

"This creates the danger of slowing the recovery and it is possible that Vickers' recommendations could add to this problem.

"Given the timescales for the implementation of credit easing, the time may now have come for the government to consider the introduction of an SME bank."


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  • rate this

    Comment number 735.

    @730. Sergoba

    I might have had some sympathy for that idea but politicians of the last 13 years have been just as bad if not worse than executive bankers with the insane levels of debt and total economic mismanagement, the government is the last organisation that should control any commercial organisations, we just need good independent expert regulators like the FSA but they need to improve.

  • rate this

    Comment number 734.

    @144. Dungolfin -
    So that will be as opposed to the borrowers who self-certed and misled about income (such as a now-struggling couple who knew their income was to drop significantly but hid a pregnancy to get the high mortgage they needed)? Bankers are not solely to blame. Some (not all) borrowers can't be absolved from blame. Anyone who says this is not an apologist - they are a realist!

  • rate this

    Comment number 733.

    "Whether rewards are appropriate or not is a matter for shareholders, not for you, not for the government."

    Well I can think of a bank or two where we are the shareholders so in those cases IT IS for us to decide....When do all the taxpayers get their invite to the AGM so we CAN have our say?

  • rate this

    Comment number 732.

    So that gives the plundering bankers another eight years to fill their boots. I wonder how much they will manage to get their greedy hands on in that time.

  • rate this

    Comment number 731.

    RTfishall...do you feel of glow of schaudenfraue ?...


    United Dreamer....I confess to being an ignorant layman to the complex world of derivatives etc...

    I determined some while ago to try and educate myself....

    I know the basics of having solid assets and managing risk...the simple stuff..

  • rate this

    Comment number 730.

    I know i will get flamed for this, but in my honest opinion it is not right to have banking establishments owned by those seeking a profit. every government should have its OWN bank, and no bank privately owned. then there is no incentive for high risk gambling due to it directly impacting the state should it fail, and unlike now both profit made and dept will be the state's. damn tiny comment box

  • rate this

    Comment number 729.

    Amazing that it will take until 2019.Hopefully all the tax payers funding with interest will have been paid by then.
    Perhaps George is a slow thinker unless he is selling "Rock"

  • rate this

    Comment number 728.

    And they move in spite of all mock indeed !

    When Cameron was is Berlin resently he assured that he would be in favour of reforms of the financial markets as long as they are introduced worldwide.

    Now his chancellor goes a step in the right direction and possibly, but not too much probably, they fight for the reforms on the next G8 and G20 summits.

    As the Germans do there for about two decades.

  • rate this

    Comment number 727.

    714.Darren Shepperd
    'really well perhaps you should take a look at real facts we have over 1M more unemployed thanks to the tories'

    You can't just blame everything on the tories, just cos it suits you, Labour were in power for 13 years and must take responsibility for their part.

    Until this happens in politics (on all sides) we will never move on

  • rate this

    Comment number 726.

    you do realise those banks selling them as triple A knew they were junk don't you?
    in America they are looking to file some major legal proceedings at the people who knowingly sold junk bonds as triple A
    At least in America their bankers face real justice not the joke tories offer here "naughty boy now don't do it again and enjoy your massive bonus wont you drinks later old bean"

  • rate this

    Comment number 725.

    The reforms are actually very mild (the dividing line between investment and retail banking is too flexible and the asset ratio regulation only prevents wildly risky ventures) and could have gone much further to really protect savers. However, they are sensible, long-term, proposals.

    No doubt even these tame reforms will be scrapped/watered down due to vested interests and lobbying.

  • rate this

    Comment number 724.

    #710 "But it seems you can afford the cost of a Internet connection"

    Haw haw how priceless!

    Let them eat cake!

    Hear that rumble of the tumbrils...?

    711 - really amazing the worldwide power Gordon Brown had isn't it? Anyone would think it impossible for a small offshore island of 70 million to so totally dominate the planet that he could bring the lot down in ten short years

  • rate this

    Comment number 723.

    We need economics taught in schools

    ++Please no. Economics needs banning altogether. Economists are great at telling us what happened but can predict NOTHING. They still try fitting our current problems to their academic solutions and it don't work! It must be the poor quality of crystal balls available these days

  • rate this

    Comment number 722.

    first of all, let me throw my hands in the air and say I am a cynic. Not sure when it happened, sometime in the last 20 years I guess. I would trust the words of George about as far as I could throw him. He is not alone in this. I just do not believe a single word any of these guys says. Why? Oh, that's easy. Ask him to justify the salary & bonus of Stephen Hester. Job done. Sorted.

  • rate this

    Comment number 721.

    Ref 704.

    a. If Casinos are no different to people doing the National Lottery - except that people visit large casinos to watch the shows.

    b. Billy Bragg led the effort and a government committee to try to pursuade the "I`m not listening" Labour government but they would not listen.
    c. Being able to perform Villa Lobos take a bit more skill than "Twanging a guitar" - what pieces can you perform?

  • rate this

    Comment number 720.

    Once again, those in charge show that they don't have even a basic understanding of banking or economics. The current crisis was characterised by a domino effect - a problem at one bank affects all the other banks because they borrow large amounts from each other on a daily basis because of how highly leveraged they are. Splitting retail and investment will make absolutely no difference to this.

  • rate this

    Comment number 719.

    Lucid and Vermillon...

    Sometimes arguing about the shadow, we often lose sight of the substance...caught up in the need to be right....its healthy to have opposing views...

    I think the consensus of people I talk to, is there needs to be a re-adjustment of values..

    I`d agree its really a philosophical debate..morality and pragmatism...I couldn`t put it better...

  • rate this

    Comment number 718.

    Re 215 "We account for 20% of UK GDP" -20% of UK GDP minus bailout and tax avoidance through offshore wings of the bank, I doubt you are anywhere near the 20% GDP once that is factored in.
    "I work hard...and deserve my bonus" -Its that level of objectivity that is a part of the problem. I have no problem with large bonuses but coupled with success, not failure! (I'm a former Investment banker btw)

  • rate this

    Comment number 717.

    When I think of 'Greed', Ponzi comes to mind. Not only the person running the scheme but the people who bought into it as well. What would drive anyone to put their life savings into something they are told will make them 100% in the first year? Bells should have gone off right away, didn't because of .... greed. I don't feel sorry for them.

    Anyway, I wish you all well.

  • rate this

    Comment number 716.

    #710 RTFishall - as I said, disdain for the disadvantaged... Very sad.


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