Government to force banks to split

Banks must divide their retail and investment operations to protect customers and prevent another financial meltdown, says Vince Cable.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

It's a win for Sir John Vickers and his team of risk-wallopers but a definite loss for the banking industry, which stands to lose up to £7bn in the reshuffle.

The Independent Commission on Banking report, which came out in September, catalogued the reforms necessary to stabilise the UK financial system and defend against future shocks. The government has been ruminating over the recommendations for three months: implement the changes wholesale? Or listen to the banks' lobbyists and water down the legislation?

Over the weekend, Vince Cable ended the stalemate. He came out, all guns blazing, in favour of the former. '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,' he told the BBC.

UK banks have until 2019 to separate their retail and so-called 'casino' operations to ensure that any future trauma on the markets - or legislatory leap-frogging and financial tomfoolery - does not affect the ordinary man or business on the street. In addition to this 'ring-fencing', banks are going to have to substantially bolster their capital reserves to minimise the risk of future bail-outs.

Chancellor George Osborne will add his weight to Cable's argument today, addressing Parliament in favour of the action this afternoon.

But could this have negative repercussions for the UK economy? Well, the hefty £4-£7bn cost (some say this figure could spiral to £12bn) of shoring up capital is likely to leave banks feeling pretty bruised. Smaller banking institutions will have to stump up at least 10% of domestic retail assets in order to continue trading in this country. Larger, riskier operations like global banking giant HSBC will have to find a safety cushion of between 17% and 20%, prompting rumours of a mass exodus from the UK as banks seek new, more bank-friendly territories in which to headquarter.

If they stay, who is likely to bear the brunt of these reforms? Probably small businesses and the consumer, as banks fight to presenve profit margins.

Nevertheless, this new legislation will go ahead. As the business secretary said yesterday: 'We have accepted the recommendations of the commission.' Sir John Vickers will be drafted back in to follow the banks' progress implementing the new ring fences and to blow the whistle on any attempts to circumvent the new regulation.

Is this the beginning of a safer, more robust financial system in the UK? Or has government called war on the banks to the nation's detriment? We have seven long years to find out.

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