The British government will today give its full backing to proposals to shake up the country's banks, forcing lenders to form barriers between their retail and riskier investment arms to protect ordinary customers better in case of a crisis.
Chancellor George Osborne will issue his formal response this afternoon to proposals that were laid out in September by the Independent Commission on Banking (ICB), headed by Oxford University academic Sir John Vickers.
The Conservative/Liberal Democrat coalition government set up the ICB after the 2007-2008 credit crisis saw Britain have to nationalise Northern Rock and part-nationalise Royal Bank of Scotland and Lloyds.
Those bailouts came at a considerable cost to Britain, with £66 billion of taxpayers' money pumped into RBS and Lloyds, and authorities around the world are keen that taxpayers do not pay the price for bank failures in future.
"Our own financial services sector needs reform. Our big banks were at the very centre of the financial crisis, what the Europeans call Anglo-Saxon financial capitalism. It needs reform," British business secretary Vince Cable said yesterday.
"That's why tomorrow, the government is going to launch this initiative on the banks accepting in full the Vickers commission. We're going to proceed with the separation of the banks, the casinos and the retail business lending parts of the bank.”
Cable said the new legislation caused by the ICB's reforms would be completed within the lifetime of the current parliament, namely before 2015.
The ICB itself has said banks should have until 2019 to implement in full the proposals - in line with plans by the Basel committee of global banking regulators to impose tougher capital requirements on banks also by 2019.
In September, the ICB said top British banks should establish a "ring-fence" between their retail and investment banking operations.
It said banks should hold core capital of 10 per cent, plus a further 7 to 10 per cent of capital that could take the form of "bail-in" bonds - debt that can take a loss or convert into equity to recapitalise a bank if it hits trouble.
There would also be limits to the extent to which a bank could use money in its retail arm for its investment bank - a move that will increase funding costs for British lenders.
The ICB stopped short of seeking a full split of a retail and investment bank into two separate companies. Instead, it said banks could keep their parent holding company but should form the "ring-fence" between the retail and investment arms.
Britain's "Big Four" banks - Barclays, HSBC, RBS and Lloyds - have lobbied against much of the reforms and are likely to continue to do so.
They have argued they could be at a competitive disadvantage to rivals in Europe, Asia and the United States, which do not face the same sort of shake-up.
They have said the costs of the reforms would be more than the top end of the £4-7 billion estimated by the ICB, and that these costs could make it harder for them to lend to businesses and customers, which could hurt the overall economy.
The proposal on "bail-in" debt has also been attacked by HSBC and Standard Chartered, which have warned they could quit their London headquarters for rival business centres in Asia, where they make much of their profits.
The proposals would see Britain follow Switzerland and Sweden in setting a benchmark in capital rules on banks, since the size of each of those countries' bank sectors is greater than their national GDP (gross domestic product), thereby creating a greater risk for taxpayers.
Reuters