British finance minister set to endorse bank ring-fencing

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Finance minister George Osborne was Wednesday set to endorse a call for British banks to ring-fence retail operations from their investment arms to avoid another financial crisis, a treasury source said.

Chancellor of the Exchequer Osborne, part of the Conservative party heading a coalition government with the Liberal Democrats, will make the announcement in a high-profile annual address to business leaders in central London.

Osborne will approve the findings of the Britain's Independent Commission on Banking (ICB), which earlier this year called for a "ring-fencing" of retail businesses that would not allow investment-division losses to sink banks.

The Treasury source told AFP that the chancellor was expected to give "an endorsement of the principles" of the ICB's interim report.

"This is a far reaching shake up to make High Street banks safer and protect taxpayers," the source added ahead of the Mansion House speech.

"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.

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

Banks need to protect retail operations from investment banking activities, and set aside more capital to prevent more state bailouts, the Commission said in an initial report in April.

The Commission is seeking to protect borrowers and savers in the event of another financial crisis and will publish its final report on September 12.

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 report followed fierce criticism over so-called casino banking -- a term commonly used to describe the high risks taken by investment bankers who were slammed for their role in the devastating global financial crisis in 2008.

The Commission had also suggested that banks 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 be able to lend only about 10 times what they hold rather than the 14 times allowed by the international minimum.

Osborne was also expected to back this proposal, as well as a call to privatise Northern Rock -- a bank nationalised by Britain's previous Labour government as the lender foundered when the financial crisis took hold in 2008.

The ICB also recommended that state-rescued Lloyds Banking Group sell more assets to boost competition.

© 2011 AFP

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