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.

Ringfence

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
    0

    Comment number 795.

    Tio Terry
    Labour had to promise to keep much of what the conservatives had done to gain power
    which made change impossible for them
    therefore they never had a mandate for change and would have soon come under attack if they had tried to
    People keep trying to change history for there own ends

  • rate this
    +1

    Comment number 794.

    When are long term private shareholders, such as bank employees, current or retired, to be given increased voting rights? Many saved incredibly hard in share save schemes to help cost of living expenses or for retirement and have subsequently lost personal fortunes as a result of the crass decisions of Boards in the banking crisis

  • rate this
    0

    Comment number 793.

    Darren Shepperd 788

    How did the bankers create a budget deficit given that they don't govern the country?

    I know they told gordon that they had beat boom & bust and that he could bankroll labour spending on the taxes generated. oh and why not borrow some more 'cos it's only going to get better. Read objectively around this - facts support that this is what happened.

  • rate this
    0

    Comment number 792.

    Doctor Bob.

    Good idea!

    Cheers

    Will


    721.Will
    Ref 704.
    c. Being able to perform Villa Lobos take a bit more skill than "Twanging a guitar" - what pieces can you perform?



    ++Give him the 12 Studies! I wonder which will be worse, his playing or shafeul grammar and lack of eloquence.

  • rate this
    0

    Comment number 791.

    Tanlewood
    your facts are quit correct but remember the bailing out of banks was an extraordinary bill not budgeted for by any country
    Therefore whilst it was a little reckless it was manageable and even cross party acceptance of what they were trying to do
    Many a company has gone bust when exceptional circumstances come to call
    So to apportion complete blame or majority blame is also wrong

  • rate this
    -1

    Comment number 790.

    788.Darren Shepperd

    Due to Bankers? Yes, when Labour was in charge, not the Conservatives. Labour failed miserably to regulate the banks, thats why we have the problems we do. The Conservatives, with their Liberal friends, are attempting to put right the Labour wrongs.

  • rate this
    0

    Comment number 789.

    #788: Deficit due to the bankers? I guess that the last Labour government's habit of spending £4 for every £3 brought in through tax had nothing to do with it! This is not simple situation - rather, the combination of many factors including failed governance within some banks, profligacy of government spending, overheated consumer credit, and corporate short-termism (banks and elsewhere).

  • rate this
    +1

    Comment number 788.

    780.essiritussantos
    don't forget these bankers have no morals at all and would happily sell all their families if they could make one extra penny. They think only they should be able to evade tax not others.
    Most people call such people hypocritical, shallow, selfish and greedy but its quicker just to say investment bankers and tories
    scarf do you forget teh devficite was due to the bankers?

  • rate this
    -2

    Comment number 787.

    Eddy from Waring 779

    ...... Or a sense of humour ........


    The budget deficit left by Labour is the issue that is skirted around in the obtuse replies ......

  • rate this
    0

    Comment number 786.

    778.mbco1975
    who claimed they were risk free but they are a lot lower risk when managed correctly.
    Clearly you ignore the fact it was not the mortgages issued here in this country that were the problem
    you want the banks to carry on gambling with other peoples money at other peoples risk and them claiming they have a right to obscene amounts of money when they are nothing more than gamblers

  • rate this
    +2

    Comment number 785.

    Tonights BBC News, George Osborne-The British Government is not to subscribe to the IMF that has asked for a 200 billion fund to help out failing eu countries unable to pay their way. At long last common sense is beginning to prevail.

  • rate this
    +7

    Comment number 784.

    Capitalism is a great system. It has worked well in the past and will continue to do so in the future. But I think that as individuals and as a society, we need to learn to apply it in a more responsable and sustainable way.

  • rate this
    +4

    Comment number 783.

    Nothing new under the sun. This is exactly how it was in the 1960s when they were called merchant banks, joint stock banks and building societies. Your bank manager knew you personally and you had to prove to him you could handle a loan. And who changed this? Mrs Thatcher, who said this was repressive, banks could be trusted and the market would provide. Right ...

  • rate this
    +3

    Comment number 782.

    #778: The regulations applied to risk measurement (Basel II) are a big part of what resulted in "this mess" ... unfortunately for many, the complex formulae used to assess banks' exposure and liquidity assume(d) that domestic mortgages are/were a relatively safe form of lending. Add in the market distortion of Freddie & Fannie and toxicity of sub-prime loans is/was easily concealed.

  • rate this
    +5

    Comment number 781.

    Bankers are paid large sums of money for their performance.

    They failed. They should lose their money.

    We should issue an idiot tax and everyone in charge of the banks in the last 5 years should be forced to give everything they own to the state and live on minimum wage for the next 5 years. Cleaning streets the only job they are allowed. In the meantime their property will go to the homeless.

  • rate this
    +3

    Comment number 780.

    It makes me laugh Norman Brooke gets marked down because he want the end of tax havens
    The people marking him down are the ones who are blaming the Greeks for not paying their taxes for their problems there is no difference
    Both damage the economy, some just plain stupid at least keep your arguments consistent

  • rate this
    +5

    Comment number 779.

    775.Scarf66

    "...Lefties never are very good at Maths..."

    ====

    A socialist scientist
    Albert Einstein
    Edited by Jim Green (part of the Rebel Lives series)
    Published by xxxxxxxxx, 2004
    Reviewed by Senan

  • rate this
    0

    Comment number 778.

    @766.Darren Shepperd "Funny you seam to ignore domestic mortgages and loans to SME as-well as personal loans."

    So mortgages and loans are risk free? Haha, classic.

    You seem to have forgotten what go us into this mess.

  • rate this
    +2

    Comment number 777.

    There is much in common between Kim Jong Il and the Financial Masters of the Universe in that they both shut themselves off from the outside world and invented their own fantastical reality in which to exist and reward themselves.

  • rate this
    +1

    Comment number 776.

    753 PNorth

    From Ron C @ 145

    I sincerely hope you read me rightly, I was being facetious on the billions. I agree about the deficit mess.

 

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