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."

 

More on This Story

The BBC is not responsible for the content of external Internet sites

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • 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
    +9

    Comment number 764.

    What is appalling is listening to the tone of those who think our system is superior. In the 60s it was easy to get a job and a house, in the 80s it was hard to get a job but easy to get a house, Today its hard to get a job and a house. What has British style capitalism up its sleave for 20 years hence one shudders!

  • rate this
    +8

    Comment number 750.

    A good start but still missing a critical bit. Accountability. As long as bank executives can retire to their £3 million mansions and live off their accrued bonus', they won't worry much about playing roulette with our money and expecting the government to give them what's left ( our taxes) to bail them out. Same goes for the politicians who were in on the roulette game. They don't need naming.

  • rate this
    +1

    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
    +6

    Comment number 695.

    Banks don't force consumers to take out loans. True, they can make it easier for people to take out loans. But when a loan goes bad - who's at fault, the lender or the borrower. In my view, both have to take their fare share of responsibility.

 

Comments 5 of 13

 

More Business stories

RSS

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.