Ring fencing will kick as recommended by ICB Vickers report
The high street operations of high street banks will be “ring-fenced” from the risks run by “casino” elements within the same group under reforms to the banking system outlined by George Osborne.
The chancellor told Parliament the reforms, which are designed to prevent another financial crash, will be implemented in full by 2019. Many of the proposals set out by the Independent Commission on Banking (ICB) are included in the reforms, including safeguards to protect the areas of banks which deal with consumer and small business accounts.
Banks will also be required to hold equity capital of 10 per cent under the reforms, some three percentage points more than the level proposed in the international Basel III agreement, which will act as a “cushion” against any future losses.
Taxpayer-backed RBS has been told to scale down its investment activities and instead focus on becoming a “stronger, safer bank, able to maintain lending to businesses and consumers”, Osborne said.
Individuals and small businesses will be able to change banks quickly and easily under new reforms to be implemented by September 2013, which should help to increase competition in the sector.
Osborne told MPs the changes amounted to “the most far-reaching reforms of British banking in our modern history”. In a statement detailing the Government’s response to the Vickers Report, he said: “Our objective is to make sure what happened in Britain never happens again, that taxpayers are protected and that customers get a better service…
“We want to separate high street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.”
GDP from the banking sector will be reduced by £800m to £1.8bn, said the chancellor, while the changes will cost the industry between £3.5bn and £8bn a year. However, the costs would be “far outweighed” by avoiding future financial crises, which Osborne said could reach £9.5bn a year on “modest” assumptions.
Legislation to put the reforms in place will be in the statute book before the end of the current Parliament, while banks will be required to erect ring-fences “as soon as practically possible” after this point. The changes relating to loss-absorbency should be implemented by the end of 2019.
The ICB’s chairman Sir John Vickers welcomed the reforms outlined by Osborne and said they followed the recommendations of his report. Sir John said: “The costs and dangers of unreformed banks are plain for all to see. With the architecture for reform now settled, a more stable structure should now be built.”
Shadow chancellor Ed Balls said: “It is vital that the government now implements these important banking reforms without foot-dragging, back-sliding or watering them down.”