Britain has announced plans to separate the retail and investment arms of its banks to prevent a repeat of the financial crisis that triggered massive state bailouts.
Backing the recommendations of the government-appointed Independent Commission on Banking (ICB), finance minister George Osborne also ordered Britain’s biggest banks to substantially increase their capital buffers.
“While a European and international regulatory response to the crisis is important, we cannot rely on this response to make our banking system safe,” Chancellor of the Exchequer Osborne told parliament on Monday.
“The government will separate retail and investment banking through a ring fence (…) to protect the British economy, protect British taxpayers and make sure nothing is too big to fail.”
Legislation on ring fencing will be completed by the end of the current parliament in May 2015, while banks will be expected to comply “as soon as … possible thereafter”, said Osborne.
The ICB – chaired by former Bank of England chief economist John Vickers – issued a report in September that recommended a series of measures to protect retail operations by 2019.
The radical overhaul is an attempt to avoid a repeat of the massive state bailouts of lenders, including Royal Bank of Scotland, sparked by the 2008 global financial crisis.
The sector overhaul is to be pushed through despite an expensive and intensive lobbying effort on the part of lenders, who say the changes will hinder their business.
Osborne on Monday estimated that the changes would cost Britain’s banking sector between STG3.5 billion and STG8 billion ($A5.5 billion and $A12.5 billion) a year.
Analysts believe the higher charges risk being passed on to customers, while some say it could force banks such as Barclays and HSBC to relocate abroad.
Large ring-fenced banks will be required to hold equity capital equal to “at least 10 per cent” of their risk assets, and big banks “at least 17 per cent” by 2019. The ICB had called for a loss-absorbing capacity of between 17 and 20 per cent.
British banks are being asked to increase their capital buffers far above levels agreed under the international Basel III agreement – which calls on European lenders to hold at least 10 per cent core equity against their assets by the end of the decade.
Osborne’s creation of the ICB in June 2010 followed fierce criticism over so-called casino banking – a term used to describe the high risks taken by the investment bankers denounced for their role in the global financial crisis.
Britain has meanwhile received EU backing for its reforms, according to a report on Monday.
“Vickers can be implemented fully in the UK in a way that is compatible with EU law,” a spokeswoman for Michel Barnier, the European commissioner for the internal market, was quoted as saying in the Financial Times.
Its backing comes despite Britain rocking the European Union earlier this month when Prime Minister David Cameron vetoed a proposed treaty on measures intended to boost integration and save the beleaguered euro.
Cameron has said proposed new EU regulations governing financial services were not in the British national interest.
Also on Monday, Britain’s financial services watchdog unveiled plans to shake up the country’s mortgage market aimed at preventing a return to irresponsible lending by banks.
The Financial Services Authority said property loans should be advanced only when there is a reasonable expectation that clients can repay the debt without relying on “uncertain” future house price rises.
