UK moves to toughen bank rules

BRITISH CHANCELLOR of the exchequer George Osborne has accepted recommendations to toughen rules for banks operating in the UK, saying they are “the most far-reaching reforms of British banking in our modern history”.

The Independent Commission on Banking’s proposals in the Vickers report have been accepted by the Conservative-Liberal Democrat coalition, although some of the measures will not come into effect until 2019.

Tougher rules are necessary, Mr Osborne said, to deal with the “British dilemma”, ie “how Britain can be home to one of the world’s leading financial centres, without exposing British taxpayers to the massive costs of those banks failing”.

Speaking in the House of Commons, he said: “We want to separate high-street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.”

Under the changes, the retail arms of banks operating in the UK, including non-UK banks, will have to keep personal deposits in a “ring-fenced” operation separate from their investment banking operations and will be forbidden from lending excessively to their investment arms.

Large retail banks will have to keep much bigger capital reserves – a full three percentage points higher than is proposed under the Basle III agreement – and they will have a “loss-absorbing capacity” of 17 per cent.

The coalition’s response to the Vickers report has contradicted those who had argued that Mr Osborne would be unable to reach a compromise with the Liberal Democrat business secretary, Vince Cable.

Mr Cable said the ring-fence legislation would be law by 2015.

Mr Osborne said the new rules would cost the banking industry £3.5 billion (€4.17 billion) to £8 billion a year and lead to a reduction in the UK’s GDP of between £800 million and £1.8 billion, but he said the price was worth paying to stave off future banking crises.

Mr Osborne has to balance the cost of future bank bailouts with the importance of the City of London, since it is worth £40 billion to the UK economy, representing about 10 per cent of GDP.