Britain backs separation of banks

19th December 2011, Comments 0 comments

London will announce action on Monday to split the retail and investment units of British banks as part of tighter government regulations to prevent a repetition of the financial crisis.

Finance minister George Osborne will tell parliament that the coalition government has accepted the recommendations of the government-appointed Independent Commission on Banking.

The ICB -- chaired by former Bank of England chief economist John Vickers -- issued a report in September that recommended measures to protect retail operations as part of sweeping reforms to be brought in by 2019.

The radical overhaul is an attempt to avoid a repetition of the massive state bailouts of lenders, including Royal Bank of Scotland, sparked by the 2008 financial crisis.

Business minister Vince Cable confirmed on Sunday that the Conservative-Liberal Democrat government had accepted the proposals.

Chancellor of the Exchequer Osborne will provide fuller details in a statement to parliament at 1530 GMT.

The sector overhaul, which will also require banks substantially to increase their capital buffers, is to be pushed through despite an expensive and intensive lobbying effort on the part of lenders.

The commission itself has estimated that the annual pre-tax cost to lenders of the reforms will total between £4.0 billion and £7.0 billion (4.8 billion and 8.3 billion euros/$6.2 billion and $10.8 billion).

Analysts believe that the higher charges risk being passed on to customers, while some say it could force banks such as Barclays and HSBC to relocate abroad.

"We have accepted the recommendations of the commission," Cable said on Sunday.

"It is absolutely right that we make the British economy safe. We just cannot risk a repetition of the financial catastrophe we had three years ago.

"Big structural reform of the banks was something we (Liberal Democrats) fought for and argued for and now it is going to happen." Osborne is a member of the Conservatives, whose leader is Prime Minister David Cameron.

According to the ICB, British banks should also increase their capital buffers far above levels decided under the international Basel III agreement, while the sector must face greater competition for the benefit of customers.

The ICB has said that Britain's banks should hold at least 10 percent core equity against their assets -- significantly more than the 7.0 percent required by the end of the decade under the Basel III rules agreed last year.

Banks should also have a loss-absorbing capacity of between 17-20 percent of its total assets, including the equity capital base, the commission said.

It additionally called for improved measures to help consumers switch current accounts.

Osborne's creation of the ICB in June 2010 followed fierce criticism over so-called casino banking -- a term used to describe the high risks taken by investment bankers denounced for their role in the global financial crisis.

Britain has meanwhile received EU backing for its reforms, according to a report on Monday.

"Vickers can be implemented fully in the UK in a way that is compatible with EU law," a spokeswoman for Michel Barnier, the European commissioner for the internal market, was quoted as saying in the Financial Times.

Its backing comes despite Britain rocking the European Union earlier this month when Cameron vetoed a proposed treaty on measures intended to boost integration and save the beleaguered euro.

Cameron has said that proposed new regulations governing financial services were not in the British national interest.

Also on Monday, Britain's financial services watchdog unveiled plans to shake-up of the country's mortgage market aimed at preventing a return to irresponsible lending by banks.

The Financial Services Authority said property loans should be advanced only when there is a reasonable expectation that clients can repay the debt without relying on "uncertain" future house price rises.

© 2011 AFP

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