Britain backs retail bank ring-fencing, Northern Rock sale
Finance minister George Osborne announced a major overhaul of Britain's banks Wednesday by approving a separation of their retail and investment businesses to help avoid another global financial crisis.
Osborne, part of the Conservative party heading a coalition with the Liberal Democrats, also unveiled the privatisation of Northern Rock, three years after it was nationalised to save it from collapse in the global financial crisis of 2008.
In a high-profile annual address to finance leaders in central London, Osborne backed the findings of the government-appointed Independent Commission on Banking (ICB) which earlier this year called for a "ring-fencing" of retail businesses.
"Today I have told the Commission that the government endorses both these proposals in principle ... We will make these changes to banking to protect taxpayers in the future," he said.
Osborne said he had taken the decision bearing in mind a "British dilemma."
"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," he said.
"But we cannot afford to let it pose a risk to the stability and prosperity of the nation's entire economy."
After months of speculation and deliberation on Northern Rock, which was nationalised by the previous Labour government, Osborne said the coalition had to "clear up the mess of the past."
"I can announce tonight that on behalf of you the British taxpayer, I have decided to put Northern Rock up for sale," he said, adding that they could "at least get some of our money back."
He did not set a price but the BBC said the government planned to sell it to a single buyer for about £1.0 billion (1.14 billion euros, $1.62 billion), less than the £1.4 billion handed to the lender by the state.
Potential buyers for Northern Rock could include Virgin Money, the Coventry and Yorkshire building societies, investment groups NBNK and Olivant, and Tesco Bank.
Northern Rock plunged into crisis in mid-September 2007 when its exposure to the US-triggered credit crunch forced it to seek emergency assistance from the Bank of England, sparking the first run on a British bank in recent history.
To avert financial meltdown, the government government agreed in December 2007 to guarantee all customer deposits and then later nationalised the bank in February 2008 to prevent its collapse.
The lender was broken up into two parts last year, forming a so-called "good bank" that will be up for sale -- and a "bad bank" management company to run down the remaining toxic assets.
The bank, which is based in the northeastern English city of Newcastle, has repeatedly stated that it would work alongside the government to facilitate its return to the private sector.
Banking shares fell heavily in Wednesday trade, with Barclays closing down 1.58 percent to 260.73 pence and Royal Bank of Scotland shedding 1.53 percent to 40.91 pence.
Banks need to protect their retail operations from their investment banking activities and should set aside more capital to avoid future state bailouts, the ICB said in an initial report in April.
The Commission is seeking to protect borrowers and savers in the event of another crisis and will publish its final report on September 12 when it will outline how exactly the so-called banking "firewall" will work.
The practice of banks using money from their retail arms to fund investment operations was widely blamed as a major factor behind the global banking crisis.
The ICB report followed fierce criticism over so-called "casino" banking -- a term commonly used to describe the high risks taken by investment bankers in the run-up to the crisis.
The Commission also suggested that banks raise their core capital reserve levels above the international minimum of seven percent, to provide a greater cushion against the risk of failure.
The measure would mean that they would be able to lend only about 10 times what they hold in deposits, rather than the 14 times allowed under current international standards.
© 2011 AFP