The British Government will resist calls for it to copy President Barack Obama’s far-reaching reforms of America’s banking system, ministers said today.
In contrast, the Conservative Party endorsed the Obama plan to prevent banks or financial institutions that own them from investing in, owning or sponsoring a hedge fund or private equity fund and ban institutions from proprietary trading - investing to make a profit for themselves rather than on behalf of customers.
The Tories renewed their call for high street banking to be split from riskier investment banking and would pursue the idea if they win the general election. However, they admitted that such a radical overhaul would need international agreement in a global financial market.
The surprisingly tough Washington blueprint to put a cap on the size of banks caused turmoil on the financial markets today. Barclays shares dropped 4 per cent and the Royal Bank of Scotland fell by 2.9 per cent.
The proposed shake-up will be discussed by G7 finance ministers in London on Monday. But Lord Myners, the City minister, who will chair the talks, said the Obama plan was designed for the "idiosyncratic problems" in the United States, arguing that proprietary trading (betting for a bank’s own profit), hedge funds and private equity were not at the heart of the UK crisis.
Lord Myners said the Government would not separate investment from universal banks. "He is taking the right policy responses for America and we have taken the right responses in the UK," he said, while insisting: "What President Obama has announced is entirely consistent with the actions we are taking, in terms of de-risking the banking sector."
Downing Street said it was "premature" to give a detailed response until the fine print of America’s plan was known. "It's directionally something the Prime Minister is very comfortable with," said Gordon Brown’s official spokesman. "We are going to study the proposals. Each country will have a particular set of circumstances."
George Osborne, the shadow Chancellor, said: “This is a welcome move by President Obama that accords very much with our thinking." He said the move cleared the way for an international agreement and claimed Mr Brown was “isolated” in opposing Tory plans to break up banks judged “too big to fail.”
Mr Osborne said retail banking should be separated from activities such as proprietary trading but ruled out a “crude” split like the Glass-Steagall legislation introduced in the 1930s, repealed in 1999.
Although Barclays and RBS will be worried about his remarks, it is doubtful what urgency an incoming Tory Government would give to a banking shake-up. Tory insiders admit the party’s top priority would be cutting the deficit in the public finances. A Tory policy document published last July said: “While there are some valid arguments for this approach [a split between retail and investment banks] if implemented at an international level, it would not be feasible or desirable for the UK to impose an absolute separation unilaterally. Instead, we will instruct the Bank of England to use capital and liquidity requirements to achieve the same objectives, whole continuing to examine the case for a more structural approach in international forums.”
The Liberal Democrats also welcomed the Obama scheme but accused the Tories of rewriting history, saying their “support” for breaking up the banks had been much weaker than the Liberal Democrats’ consistent calls for such an approach.
Vince Cable, Treasury spokesman for the Liberal Democrats, said yesterday that the Government should "get on with breaking up the banks". He added: "It is absolutely essential that Britain is not left behind by the US. Britain is much more dependent on banks than America is and we are therefore much more vulnerable to banking crashes."