Britain should 'go it alone' and shake up banks, MPs say

Report also urges 'narrow banking' rethink as Obama forces US banks to heel

Britain should be prepared to "go it alone" with radical reforms to the banking system in the wake of the £1.2 trillion bailout of the industry if a cross-border deal cannot be achieved, an influential committee of MPs will recommend today.

The Treasury Select Committee will also call on the Government to look again at restricting the types of business that deposit takers can do in the wake of moves by US President Barack Obama to enforce "narrow banking".

In its latest report into the banking crisis – published this morning – the Treasury Select Committee says: "The prevarication on international agreement must not be used as an excuse to delay, or, at worst, prevent reform. Britain has a very large banking system relative to GDP compared to other countries, and its reform is anyway in our own self-interest, even if it is not coordinated with reforms in other countries." The report goes on to say that it supports a strong and successful banking system in Britain.

It argues that "A strong banking system is good for the country, and as the Governor of the Bank of England [Mervyn King] said, 'It is not to the benefit of the City of London to be known as a place with a fragile banking system which is neither safe nor robust.'" But on the issue of enforcing "narrow banking", it says: "The Government has ruled out structural reforms such as narrow banking in its changes to the regulatory structure of the financial system. However, President Obama's proposals do include structural reforms, suggesting that the Government's conclusions are not universally accepted. The Report calls for the debate on banking reform to remain as wide as possible."

Operations such as Barclays – with large investment banking operations – have argued that during the financial crisis there were just as many failures of "narrow" banks, which concentrated on savings and loans, as there were of big and complicated institutions.

They include Northern Rock and Bradford & Bingley, neither of which had any investment banking operations; both concentrated almost entirely on advancing mortgages and taking deposits.

But the MPs say: "As a counter to structural reform, it has been argued that narrow banks also failed during the current crisis. This, in part, may be due to how those 'narrow banks' were allowed to interact with the wholesale markets. Moreover, this argument focuses on the system which existed before the crisis. Global responses to that crisis have created a new set of problems, in that markets now expect Governments to support the banking system. Structural reforms may be one way significantly to alter those expectations." Mr King is another who has spoken vocally of his support for "narrow banking" in the wake of the crisis. He will see his influence growing radically if the Conservatives win the next election. They have pledged to scrap the Financial Services Authority and to hand control of banking regulation to him.

The report further calls on regulators to clamp down on banks which are unable to prepare a "living will" to allow an orderly wind-up in the event that they fail – a key aim of regulators and politicians who want to avoid future state bailouts of troubled institutions. The report says that if an institution is too complex to prepare a "living will" it is "too complex to operate without imposing unacceptable risks to the states in which it does business".

The report concludes that "Reform is particularly pressing for the United Kingdom. In the 1970s the UK banking sector had a balance sheet of 50 per cent of United Kingdom GDP; it is currently 500 per cent of GDP.

"During the financial crisis, governments have effectively stood behind the banking system. If international banking in the United Kingdom is to remain credible, reform must ensure that the taxpayer is better protected from picking up the bill."