New proposals to make sure UK taxpayers no longer have to pay for banks’ failures have been praised by Chancellor George Osborne.
The Independent Commission on Banking (ICB) recommended that banks’ high street divisions should be ring-fenced to separate them from riskier investment divisions. It also said that banks should set aside more cash in case of unforeseen losses and future financial crises.
The ICB was set up by the government in September 2010 to promote financial stability and published its final report this week. Its proposals should be implemented by 2019.
Mr Osborne told Parliament, "The Commission has done what we asked it to do; it has come up with an answer to the question of how Britain can be the home of successful international banks that lend to families and businesses without exposing British taxpayers to the massive costs of those banks failing."
He went on to say that the UK should go beyond the new international Basel rules agreed upon in the wake of the credit crunch by the Basel Committee on Banking Supervision, a committee of 10 central banks.
"The balance sheet of our banking system is close to 500 per cent of our GDP, compared with just over 100 per cent in the US and around 300 per cent in Germany and France," he said.
The report said that the objective of a ring-fence would be to "isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers".
"This would require banks’ UK retail activities to be carried out in separate subsidiaries. The UK retail subsidiaries would be legally, economically, and operationally separate from the rest of the banking groups to which they belonged.
“They would have distinct governance arrangements, and should have different cultures. The Commission believes that ring-fencing would achieve the principal stability benefits of full separation but at lower cost to the economy."
A wide range of financial services could not be provided from within the retail ring-fence. It would be limited to payment services in the European Economic Area and to the intermediation between savers and borrowers with the EEA non-financial sector. The ring-fenced activities would have minimal exposure to the global financial markets.
In order to cushion banks in the event of financial crisis, the new rules mean that large UK retail banks would have to have equity capital of at least 10 per cent of risk-weighted assets. The retail and other activities of large UK banking groups would both have a primary loss-absorbing capacity of at least 17-20 per cent equity.
According to the Commission, none of these measures should threaten the competitiveness of UK banks.
Please read on The British Bankers’ Association urged for caution