George Osborne backs ring-fencing of retail banks

Chancellor to argue that invisible walls between investment and high street operations would protect British economy George Osborne is to give government backing to plans that will force banks to ring-fence their high street operations in an attempt to minimise the risks of a second financial crisis. The chancellor will use his annual Mansion House speech to lambast the system of City regulation inherited from Labour and will argue that putting invisible walls between the investment and high street arms of Britain’s big banks will make it unlikely they will ever need another taxpayer bailout. Amid mounting speculation in the City that the Treasury is about to announce plans to sell off Northern Rock, Osborne will say he intends to endorse proposals by the Independent Commission on Banking (ICB), chaired by Sir John Vickers. In a report in April that was criticised for not being radical enough, Vickers recommended that banks be forced to ring-fence their high street banking businesses and also hold more capital – “at least” 10% compared with the 7% currently required. Commissioned by the coalition to deal with the issue of banks being “too big to fail”, Vickers’s final report is due on 12 September and bankers may be surprised that the chancellor is prepared to back his interim recommendations so far in advance. A Treasury source said: “This is a far-reaching shakeup to make high street banks safer and protect taxpayers. The government set up the banking commission to ask the difficult questions that weren’t asked before the crisis and this is right at the heart of their answer. Britain is now leading the world in learning the lessons from the disastrous failures of the last decade.” Osborne is keen to exploit the current difficulties of the Labour party by contrasting his plan for City regulation with the cumbersome tripartite system created by Gordon Brown. He will make the announcement a year after he told City grandees that he intended to scrap the Financial Services Authority and to give the Bank of England a bigger role in policing the financial sector. Ed Balls, the shadow chancellor, who has been hounding Osborne over the weakness of the economy, was City minister for part of Labour’s third term. Treasury sources said the chancellor intended to provide “certainty” by providing details of the “repair job” for the City the government intended to undertake over the coming months. Osborne will await the final Vickers report before finalising his plans. “We need to see what Vickers concludes before deciding how high and how thick the walls need to be,” one Treasury source said. Bankers are deeply divided over ring-fencing and how it will work in practice, and the chancellor is expected to acknowledge that much work needs to be done to establish how retail businesses can be protected. One key issue to tackle is whether corporate loans and deposits should be included in the ring fence. At a hearing before the Treasury select committee of MPs last week, Stephen Hester, chairman of the bailed out Royal Bank of Scotland, warned that the value of the taxpayer’s 84% stake could be reduced by the Vickers proposals for ring-fencing. He said that ring-fencing operations away from a financial institution’s riskier investment banking operations could “create a protected beast that the government will support”. However, others were supportive of a ring-fencing idea – although disagreed about which assets should be included in the ring fence. The ICB was also set up to look at competition in the sector. It infuriated the bailed-out Lloyds Banking Group by suggesting it should sell off branches to bolster competition on the high street. Competition was reduced as result of Labour’s decision to overrule competition concerns to allow Lloyds to rescue HBOS at the height of the banking crisis. Lloyds is currently trying to sell 632 branches to obey EU rules over state aid and is pressing ahead with their sale before the final Vickers report in September. George Osborne Banking Retail industry Labour Regulators Conservatives Liberal-Conservative coalition Jill Treanor Larry Elliott guardian.co.uk

Posted by on June 14, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.