14 June 2012 Last updated at 17:51 ET

Osborne hails bank reform giving savers more protection

 

Mr Osborne defended the government's spending cuts

Chancellor George Osborne has said that "taxpayers will be better protected when things go wrong" thanks to banking reforms outlined by the government.

Earlier, Financial Secretary Mark Hoban unveiled the banking reform White Paper, following recommendations by the Independent Commission on Banking.

He said retail banks would be ring-fenced from riskier investment banking.

But Sir John Vickers, chair of the ICB, said the coalition should have done more, forcing banks to hold more cash.

"The White Paper proposals are far-reaching, but on some points - such as limits on the leverage of big banks - we believe they should go further," Sir John said.

"We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness."

'Wider range'

In his annual Mansion House speech, Mr Osborne acknowledged that risk taking in the City of London had "spilled onto our High Streets, putting taxpayers' money at risk".

"I believe that we have found a workable way to solve what I called the 'British dilemma' - protecting British taxpayers in a way that does not make the UK uncompetitive as a home of global banks."

Mr Osborne also defended the government's spending cuts, which have come in for increasing criticism given the UK's return to recession. He said growth had been hit by the eurozone debt crisis and high commodity prices.

Earlier on Monday, Mr Hoban told the House of Commons that the government would "ring-fence retail deposits from the risks posed by international wholesale and investment banking.

"A ring-fenced bank will be economically and legally separate from the rest of the group and run by an independent board."

However, the government is making an important concession to banks, who were angered at the ring-fencing proposals.

It is looking at broadening the range of activities allowed within ring-fenced operations to include certain hedging tools, for instance to protect against interest rate and currency fluctuations, where these are sold alongside loans to small business clients.

Banks have been accused of mis-selling exactly such products to small businesses in the past.

"We felt that it was in the interests of business to ensure there was a wider range of instruments included in the ring-fence, including derivatives," Mr Hoban said.

"These products are widely used. There is a need for them."

The British Bankers' Association had warned that the original reform proposals could hurt the banking sector, and have a knock-on effect on the overall economy.

Labour's Ed Balls said there were still questions to answer, and accused the government of watering down the ICB's proposals.

"Why is the chancellor not making the statement? Or should I say the 'part-time' chancellor? What is the chancellor running scared of?" Mr Balls said.

"Isn't the truth that having failed to deliver international agreement on tougher international banking standards, the chancellor is now being forced to water down and fudge the Vickers' reforms?"

Higher costs

Steve Davies, lead partner of retail banking at the business services firm PricewaterhouseCoopers, told the BBC that the reforms would not prevent another banking crisis.

"It won't make our banks crisis-proof. What this does is to enable a failed bank to be properly recovered in the event of a crisis.

"It does not prevent a credit crunch and it does not stop a run on the bank."

He added that the reforms were likely to push up the cost of banking: "The cost of implementing the regulation is going to be substantial and the regulations are likely to force the banks to hold more capital back and those costs will have to be passed on."

The banking reform plans will remain open for consultation until draft legislation is set out in the autumn.

Plans for the final legislation are expected to be in place by 2015.