Separation of banks' retail and investment arms by 2019 part of reform to ensure taxpayers never again pay for 'casino banking'
George Osborne and Vince Cable will push ahead with plans to prevent future state bailouts of the banking industry by separating high-street lenders from "casino" investment banking.
Amid tension in the coalition over David Cameron's handling of the euro crisis, the chancellor and business secretary will present a united front on Monday, backing a report by Sir John Vickers's independent commission on banking that proposed lenders should be forced to "ringfence" their retail and investment banking arms.
Cable told the BBC's Andrew Marr Show today that the banking industry was set for "big structural reform". "The government is going to launch this initiative on the banks, accepting in full the Vickers commission," he said. "We're going to proceed with the separation of the banks – the casinos and the retail, business lending parts of the banks ... Moreover we're going to get on with it. Both the primary and secondary legislation is going to be completed within this parliament. It's got to be done. We can't have a position where the big banks are too big to fail."
When the commission's recommendations were announced in September, the chancellor promised that legislation would be passed before the next parliament, but added that he would also stick to the time frame set out by Vickers, who argued banks needed until 2019 for full adoption of the plans. The date coincides with deadlines for further international banking regulations.
The proposals also do not go as far as the full-scale split between high street banks and investment banks, which Cable had called for in opposition. However, the commission is convinced that ringfencing – which forces the banks to put high-street banking into a separate legal subsidiary that will have to hold capital of at least 10% – is a more practical way of ensuring there will never be another taxpayer bailout of banks.
However, there are differing views, many contained in a broad collection of essays on the report, recently published by the Centre for the Study of Financial Innovation thinktank. One, written by Stani Yassukovich, a former investment banker and one-time head of the predecessor to the Financial Services Authority, the Securities and Futures Authority, argues: "Following publication, we can expect the lobbying [of government by the banks] to reach fever pitch. Of course, in the real world, one would expect the views of those responsible for the mess prompting the reform to be heavily discounted by those responsible for executing the reform. But politics and the real world have little in common. Since the political class has a lamentable lack of understanding of how finance actually works, it is forced to rely on advice from roughly the same crew that sank the ship in the first place, in determining how the ship should be remodelled".
The preparation of a green and then a white paper is expected to take several months, so bankers are expected to launch fresh attempts to persuade the government to soften some of the recommendations, which also include plans to force banks to set aside more cash to cushion the blow of potential losses or future financial crises. One of the most contentious areas is the flexibility around what sits inside the ringfence, which Osborne is not expected to spell out in his statement.
Vickers is clear that deposits and overdrafts of retail customers and small businesses should be inside, while wholesale and investment banking operations, such as derivatives and trading activities, will be outside. Even so, it looks as though it will be up to the banks to decide whether to put their large, non-financial, corporate clients inside the ringfence.
The banks say they are braced for the government to implement the plans but argue that the estimated costs, of £4bn to £7bn, are too low, and could be closer to £12bn. The new legislation is also expected to heighten suggestions from banks, particularly HSBC, that they might move their head offices away from London, with the implied threat of fewer UK jobs and tax revenues.
The independent commission on banking was chaired by Vickers, a former head of the Office of Fair Trading, and was set up by the government last year to conduct a full review of the sector after the financial crisis four years ago left banks including Royal Bank of Scotland and Lloyds needing bailouts.
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Source: http://www.guardian.co.uk/business/2011/dec/18/cable-accepts-vickers-banking-reform
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