British finance minister to back bank firewalls

15th June 2011, Comments 0 comments

British finance minister George Osborne is on Wednesday likely to back plans for banks to ring-fence their retail operations to prevent a rerun of the 2008 financial crash, a treasury source said.

Osborne was likely to approve the Independent Commission on Banking's (ICB) recommendations that banks keep their high street and investment arms separate in a speech to the leaders of Britain's financial sector.

"This is a far reaching shake up to make high street banks safer and protect taxpayers," said the treasury source.

The practice of banks using money from their retail arms to fund investment operations was widely highlighted as a major factor behind the global banking crisis.

The ICB was set up to examine how banks can be made more secure and made the recommendation in April's interim report.

It also suggested that banks raise raise their 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 only be able to lend around 10 times what they hold rather than the 14 times allowed by the international minimum.

Osborne was expected back this proposal, as well as a proposal to privatise Northern Rock. It was nationalised by Britain's previous Labour government as it foundered in early 2008 as the financial crisis took hold.

"The government set up the banking commission to ask the difficult questions that weren't asked before the crisis and this is right at the heart of their answer," the treasury source said.

"Britain is now leading the world in learning the lessons from the disastrous failures of the last decade," the source added.

Some banks however have objected that the proposals to create firewalls will increase the cost of borrowing capital to fund their investment operations and thus lower their credit rating.

The exact details of how the ICB proposes to do this will not be known until it publishes its final report on September 12.

© 2011 AFP

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