Get tough on banks or else, George Osborne’s own advisers insist

Chancellor is told to break up bad banks

The Bank of England must be handed the legal authority to break up banks that misbehave, the Parliamentary Commission into Banking Standards will today tell the Chancellor, George Osborne.

The Commission’s chairman Andrew Tyrie told The Independent that the failure to do this could put Britain at risk of a fresh financial crisis. In a 140-page report, coming just two days after UBS was fined more than £900m for attempting to fix Libor interest rates, the Commission said existing plans to reform banking and impose a ring fence to protect retail depositors fell “well short of what is required”.

Mr Tyrie also said the revelations of what went on at UBS “beggar belief” and provided “the clearest illustration yet that a great deal more needs to be done to restore standards”.

He said the break-up power would protect depositors by “electrifying” the ring fence around their savings. The power would be used in the event that banks try to “game” or get around it. In recommending it, his Commission has set itself on a collision course with Mr Osborne who last month warned members not to attempt to “break up the consensus” on banking reform.

Such a radical proposal could also incite fierce resistance from the banks, which have complained that a wave of new regulations will raise the cost of lending and hold back the economy. 

But the Chancellor is now likely to face huge pressure to adopt the report in full, given the high standing of the Commission’s members. 

In addition to senior MPs on the Treasury Select Committee, it includes the future Archbishop of Canterbury, Justin Welby, former Chancellor Lord Lawson and the former Cabinet Secretary Lord Turnbull.

The report secured the unanimous agreement of them and all three political parties represented on the Commission. It calls for bank directors to be given a legal duty to protect the integrity of the ring fence, which the report wants to be made subject to an independent annual review. The power to break up banks would only be available after the first review.

A bank at risk of being broken up should first be informed that it is on watch and then a reviewer will be appointed to look at the decision.

But the report also says that it might be necessary to break up all of Britain’s banks. Sir Mervyn King, Governor of the Bank of England, has been a vocal proponent of forcing a break-up.  Asked whether a  failure to “electrify” the ring fence, as the report suggests, could leave Britain in danger of a second crisis, Mr Tyrie said: “It must do. The ring fence needs buttressing and unless it is buttressed with measures of this type, the risk that it will be tested or circumvented will grow over time with attendant risks to both stability and standards in banks.” Sending a clear message to Mr Osborne, Mr Tyrie continued: “This is a very high-powered committee with long-serving members of the Treasury Select Committee, a former Chancellor and a former Cabinet Secretary and this [verdict] is unanimous.”

The Commission was set up after Barclays became the first bank to be fined for attempting to fix Libor interest rates, which are used to set the price of a huge array of financial contracts including some mortgages. Several more heavy fines are expected with the state-owned Royal Bank of Scotland likely to pay as much as £350m.

Further hearings will be held in the new year to consider whether Britain needs an equivalent of America’s “Volcker” rule, which bans banks from using their own money to place bets, known as “proprietary trading”. The Commission will also look at measures to improve the culture in banking. It is mulling changes in areas such as civil and criminal law, competition and corporate governance.

It is also investigating the collapse of HBOS and will take evidence further evidence on UBS, which it called a “manifest failure of regulation” and standards. The Treasury said it would “consider” the report.

Electric ring fencing: How it would work

* A ring fence of retail and small-business banking to be subject to independent annual review but no Government guarantee.

* Bank of England to hold reserve powers to break up banks that try to break ring fence. Could lead to all banks facing break-up.

* BoE’s Financial Policy Committee should oversee bank “leverage” or level of borrowing.

* Legal requirement on directors of banks to uphold ring fence.

* BoE’s Prudential Regulation Authority needs stronger mandate.

* Simple derivatives to be allowed within ring fence but more detail needed.

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Maths Teacher

£110 - £200 per day: Randstad Education Leeds: Secondary Maths Teacher for spe...

Maths Teacher

£90 - £160 per day: Randstad Education Leeds: Secondary Science Teacher (mater...

Maths Teacher

£110 - £200 per day: Randstad Education Leeds: Secondary Maths Teacher for an ...

Maths Teacher

£22000 - £37000 per annum: Randstad Education Leeds: A West Yorkshire School i...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week