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Chancellor outlines proposals to keep London as a global financial centre without risking the rest of the UK economy The chancellor, George Osborne, has set out plans to tackle the “British dilemma”, saying the country needed a settlement with the City that would keep London as a global financial centre without putting the rest of the economy at risk. Adopting a conciliatory approach to bankers in his Mansion House address, the chancellor sought to draw a line under the financial crisis by announcing the sale of Northern Rock – the Newcastle-based lender nationalised after becoming the centre of the first run on a high street bank in almost 150 years. There was speculation that the government may have to sell the bank for a loss. “Images of the queues outside Northern Rock branches were a symbol of all that went wrong, and its chaotic collapse did great damage to Britain’s international reputation,” the chancellor said. “Its return now to the private sector would help to rebuild that reputation.” Osborne said the economy was “on the mend” after the deep recession of 2008-09 but warned that the weakness of the financial sector together with the crisis in the eurozone and softness in the US economy was putting a brake on UK growth. Announcing his support for plans to ringfence high-street banking operations and the toughening up of City regulation under the Bank of England, the chancellor said the country was “within touching distance” of a “new settlement” with finance. “If we achieve it, then we will have answered the British dilemma – and put our country on the path to prosperity. I want the City of London to be a thriving centre of enterprise, more interested in serving its customers than in what government might do to it next. Resolving the British dilemma is the way to do that.” Sir Mervyn King, who will chair the first meeting of the Financial Policy Committee on Thursday – the body set up by Osborne to make sure banks do not take excessive risks en masse – also warned that the City cannot be “allowed to benefit from an unsustainable dependence on the UK taxpayer”. King added: “To allow that would be unfair to millions of people, not here tonight, who are now bearing the costs of the financial crisis. It is precisely because we do want to be an international banking centre with assets a multiple of annual UK GDP that we have to find a solution to the ‘too important to fail’ problem.” Buoyed by unemployment figures showing the biggest quarterly drop in the jobless total in 10 years, Osborne said: “Output is growing. Stability has returned. Britain is on the mend. But it is taking time.” He said the economy faced the problem of unwinding debts built up over a decade. “Of all the major economies in the world, Britain’s was the most over-borrowed. Our families were more in debt than any other in the G7. Our house-price bubble was bigger than America’s. Our government deficit higher than that of Greece.” He added that the financial system, which helped fuel the boom in the middle of the previous decade, was now responsible for holding the economy back. During the past 18 months, when the economy grew by 2.5%, the financial sector contracted by 4%. “Take the financial sector out of the equation, and economic growth in the rest of the economy during the recovery has actually been above its average rate of the last two decades. Put the financial sector into the equation, and economic growth has been below trend.” The chancellor said he was working on plans to ensure that the taxpayer was no longer “first on the hook” in the event that things went wrong in the City. But as he threw his weight behind the interim report of the Independent Commission on Banking under Sir John Vickers, he faced criticism for not waiting for the final recommendations due out on 12 September. The Liberal Democrat peer Lord Oakeshott said “we can’t rule out” that a full break-up of the banks might need to be considered by the time of the final report. The banking commission was a key part of the coalition agreement signed last year, and will report back to the chancellor and the business secretary, Vince Cable, who has called for a full separation of “casino” investment banks and high street lenders. Osborne said he would publish outlining draft legislation on Thursday that would give him power to close down the Financial Services Authority and put an end to the tripartite system of regulation involving the Treasury, the Bank and the FSA. “As a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in our national economic interests. But we cannot afford to let it pose a risk to the stability and prosperity of the nation’s entire economy. “We should strive for global success in financial services, but that success should not come at an unacceptably high price.” George Osborne Economic policy Financial crisis Recession Economic growth (GDP) Financial sector Northern Rock Mervyn King Larry Elliott Jill Treanor guardian.co.uk