Banks To See Retail And Investment Arms 'Ringfenced' By 2015

Banks To See Retail And Investment Arms 'Ringfenced' By 2015

UK Chancellor George Osborne has announced that the government will put into law recommendations to "ringfence" retail banks from their trading arms, as recommended by an influential report into the regulation of the financial sector.

The Independent Commission on Banking (ICB), widely known as the Vickers report, called for the separation of high street retail banks from their risk-taking investment banking arms, preventing trading losses and reckless exposure to failing markets from putting depositors' cash - and government bailout money - at risk.

Osborne said that the government wants to "make sure that nothing is too big to fail."

Legislation for the ringfence will be in place by the end of the current parliament, with banks expected to comply as soon as reasonably possible, he added.

The two halves of ringfenced banks should be independent companies with separate boards, Osborne said, echoing the ICB recommendation. The full package of reforms, including new capital requirements for banks, could cost the industry between £3.5-8bn, and should be completely implemented by 2019, Osborne said.

The Chancellor told MPs that while his measures would not prevent a bank from failing in the future, it would protect customers with high street bank accounts and potentially small businesses, although Osborne was keen to stress that larger corporations could keep their assets outside the ringfence.

Responding for Labour, Ed Balls - who had only seen the Chancellor's statement in full just minutes before it was delivered - suggested that there needed to be a cross-party admission of past failures in regulation. "We've all made mistakes", Balls told the Commons, urging the Chancellor to show more humility for the part he had played in opposition, when the Tories had called for even less regulation. This brought jeers from Tory MPs.

Balls warned that the long-term reforms announced today couldn't address the urgent threats to the economy caused by a lack of credit for small businesses. His view was echoed by the British Chambers of Commerce, who also said the high ratios the banks would have to hold in future could post an obstacle to growth in the medium term.

Over the weekend, senior coalition figures promised that the government had accepted the findings of the report and would push many of the recommendations through before the next election. Vince Cable, the business secretary, said on Saturday that the changes would be in law by 2015, and said that the situation that came about in 2009 - when the Royal Bank of Scotland (RBS) was judged "too big to fail" and nationalised.

The government put hundreds of billions of pounds into loans, share purchases and guarantees into RBS, Lloyds, Northern Rock and Bradford & Bingley.

Inadequate regulation and a weak system of supervision were behind the near collapse of RBS in 2008, according to a report by the Financial Services Authority (FSA) into the incident, released a week ago.

Northern Rock's branch network was sold to Richard Branson's Virgin Money in November for £747m, although the bank's "bad" assets remain on the government's balance sheet. The National Audit Office (NAO) announced on the weekend that it was to investigate the deal, despite assurances from the government that the price was fair.

The taxpayer put £1.4bn into the lender in 2010, and its sale was the first major nationalised asset that the government had managed to divest itself of.

Virgin Money, along with the Co-operative Bank - which last week was selected as the preferred bidder for 632 Lloyds branches that are being spun out - are attempting to take advantage of the government's drive to break the dominance of a small number of banks on the high street.

As well as the ringfencing proposals, other measures to free up competition amongst high street banks - including introducing free account transfers between companies - are recommended in the Vickers report.

This greater competition could see terms improve for depositors, but the creation of isolated retail banks could see them drop free current accounts entirely, as they search for new profit streams, analysts have warned. The cost of borrowing for mortgages could also rise.

Banking analyst Ralph Silva at SRN, said that while funding costs for banks will be passed onto savers, the difference should be minimal, "so it is not going to change the way we live."

Banks should also hold core capital of 10%, with up to 10% more in "bail-in" bonds, which could be converted to cash if needed, the Vickers report proposes. However, HSBC and Standard Chartered have taken issue with the requirements, saying that they could be too costly. HSBC has warned it may move its headquarters overseas.

Silva said that the conjecture that the UK will become less favourable an environment for banks was "True, but the banks are exaggerating. Yes, capital will cost more, the regulatory environment will be more difficult, but overall, the benefits largely remain. They may have to work a bit harder, but end of the day, they can still make a huge amount of money."

On Sunday, Lloyds announced that its top 1,000 staff will have their pay frozen, in a bid to quieten growing political and social opposition to high levels of executive pay. In November, the High Pay Commission said that the discrepancy in income between the boardroom and the shop floor was "corrosive" to the economy and to the fabric of society.

In a speech to the Demos think tank and the Open Society Foundation, Deputy Prime Minister Nick Clegg also took aim at the bonus culture, saying that the government would use its stakes in Lloyds and RBS to attempt to drive change.

"On the eve of bonus season, let no-one be in any doubt about our determination to use our clout as the major shareholder in these banks to block any irresponsible payments, or any rewards for failure," he said.

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