Osborne announces ring-fencing plans for banks

The chancellor will today announce proposals for changes in banking which would offer better protection to savers.

by Michael Northcott
Last Updated: 19 Aug 2013

George Osborne will today reveal his White Paper on banking reform, which is expected to include measures for protecting the public who have savings invested in the major retail banks. The main measure will be to ring-fence high street retail banking, meaning that investment banking arms of major institutions will not be able to use consumers’ savings as an investment fund for their more risky trading operations.

The recommendations are built on the findings by the Independent Commission on Banking (ICB) which was set up by the government to investigate how financial services in the UK could be made safer following the near-collapse of several major banks back in 2008. But the banking community is angry at the proposals that will essentially make it harder for them to access enough cash for the big money-making investments. They say that the reforms could have consequences for the wider economy, too.

In response to the outcry, Osborne is thought to be considering allowing a broader range of financial hocus pocus to go on inside the ‘ring fence’, including instruments which could help the banks protect themselves against changes in interest rates or currency inflation. We just wonder if such allowances weren’t the reason why the whole PPI mis-selling malarkey reared its ugly head…

Banking reform is at the top of the agenda elsewhere too: the EU has been thrashing out ways of restructuring the financial services sector in Europe to brace for the possibility of a Grexit (Greece exiting the euro). More recently, Spain’s banks are threatening to collapse and had to have tens of billions of euros injected last week just to keep them afloat. The crisis has made it tough even for the Spanish government to get its hands on any credit: only today the cost of borrowing reached a euro-era high, with 10-year bond yields hitting 7%. For comparison, 6% is the threshold at which lenders start to get seriously jittery about putting up any more cash…

In a sense, Osborne’s White Paper only addresses consumer concerns, rather than the more serious issue of European banks being so highly leveraged and in debt to each other that they are on the verge of falling like dominos.

Given the dire situation on the continent (and the effect it could have on the UK economy), ring-fencing bank’s retail arms smacks of fiddling while Rome burns…

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today