Osborne backtracks to spare banks full impact of reforms

 

The recommendations of the Vickers commission on banking reform – designed to safeguard British taxpayers from the impact of another collapse of Britain's financial-services sector – will only be partially implemented, George Osborne confirmed yesterday.

In a Commons statement, the Chancellor said legislation will require UK banks to "ring-fence" their high-street banking operations and increase their capital buffers. But Mr Osborne also said the stricter capital regime would fall short of what Sir John Vickers' Independent Commission on Banking (ICB) proposed in its report.

While the ICB had argued that British banks should hold a loss-absorbing buffer of between 17 and 20 per cent of the total assets on their balance sheets, the consultation document released by the Treasury yesterday said some banks should be exempt from this rigorous requirement.

"If a bank can show that its non-UK operations do not pose a risk to UK financial stability, and thus to the UK taxpayer, this requirement should not apply," the document said.

This is believed to be a concession made specifically to benefit Standard Chartered and HSBC, which have large overseas banking operations. Both banks had argued that they would be disproportionately affected by the rules.

The Treasury also seemed to create a potential loophole in regard to the Vickers recommendation that ordinary depositors should be first in the queue to get their money if a bank were to go bust, a so-called "depositor preference" rule. The consultation document said that "further analysis and consultation is needed on the scope of its [the depositor preference] application", suggesting that the rule might not be implemented in full.

Mr Osborne told the Commons that the reforms represent "the most far-reaching changes to banking in our modern history". But the loopholes were seized upon by the Chancellor's opponents as evidence that he had watered down Vickers' recommendations after lobbying from the banks.

Labour's shadow Chancellor, Ed Balls, said the Chancellor should "explain why he is deciding to water down the Vickers proposal by not applying this [capital buffer] rule to their [the banks'] full global balance sheets" and suggested that Mr Osborne was leaving taxpayers "exposed".

Mr Osborne said primary and secondary legislation to implement the retail ring-fence will be completed by the end of the Parliament in May 2015. But the actual date for the implementation of the structural overhaul was left vague. "Banks will be expected to be compliant as soon as practically possible thereafter," the report said. Robert Jenkins, of the super-regulator – the Financial Policy Committee, has suggested that any protracted delay will allow banking lobbyists "to chip away until the [Vickers] proposal becomes both unrecognisable and ineffective".

Mr Osborne said the Government will bring forward a White Paper in the spring which will set out detailed proposals for legislation. But the report also said "the Government will work with the banks to develop a reasonable transition timetable", in an indication that the banking lobby will continue to have an opportunity to influence the implementation of the reforms.

Sir John Vickers released a statement saying he welcomed the Chancellor's "commitment to reform banking structure, capital and competition in line with the recommendations in our report". But the Financial Times writer, Martin Wolf, who was a member of the ICB, said he would need to study the report in more detail before coming to a full judgement. "I'm going to have to read their words and see what exactly it means," he said.

The Treasury document put the annual cost of the reform at up to £8bn a year, which was slightly more than the £7bn estimate of the Vickers report, but short of the £12bn that the banks have estimated. Mr Osborne said that the cost to GDP would be around £800m to £1.8bn a year.

But the Chancellor also added that such costs would be "far outweighed" from the benefits of a safer banking system. He said that a "modest" reduction in the likelihood of future financial crises could yield an incremental economic benefit of £9.5bn per year.

Mr Osborne also told the Commons that the Royal Bank of Scotland would be expected to shrink its overseas and investment banking operations considerably. "We believe RBS' future is as a major UK bank, with the majority of its business in the UK and in personal ... and corporate banking," he said.

The reforms: how the City will be affected

Barclays: The UK bank with the most to lose from the reforms. Around 40 per cent of Barclays' revenue comes from investment banking. A ring-fence will mean the bank's traders will not be able to finance their bets with the savings of ordinary depositors.

 

 

 

HSBC: The activities of HSBC's investment banking arm are also funded by the deposits of ordinary depositors so the ring-fence will have an impact. The new strict capital regime recommended by Vickers is only going to apply to the UK part of banks' balance sheets, sparing HSBC's considerable international portfolio.

 

 

 

 

RBS: About a third of RBS revenues come from the group's investment banking wing so the impact of a ring-fence will be significant. The Government, which owns 83 per cent of the bank, also wants the group to scale back its overseas investment banking arm.

 

 

 

Lloyds TSB: The Independent Commission on Banking has backed a plan to dispose of 632 of the Lloyds' branches. The group, which is 41 per cent government-owned since the 2008 bailout, does not have a major presence in the world of investment banking so the impact of ring-fencing will be small.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs General

Recruitment Genius: Trainee Health & Safety Consultant

£16000 - £20000 per annum: Recruitment Genius: A fantastic and exciting opport...

Recruitment Genius: Project and Quality Manager

£28000 - £32000 per annum: Recruitment Genius: This company is an independent ...

Recruitment Genius: Trainee Sales Executive - OTE £20,625

£14625 - £20625 per annum: Recruitment Genius: This role is for an enthusiasti...

Guru Careers: Financial Controller

£45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

Day In a Page

Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Attwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works
Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

Twitter accused of 'Facebookisation'

Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

Jane Birkin asks Hermès to rename bag

The star was shocked by a Peta investigation into the exotic skins trade
10 best waterproof mascaras

Whatever the weather: 10 best waterproof mascaras

We found lash-enhancing beauties that won’t budge no matter what you throw at them
Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

Diego Costa: I go to war. You come with me...

Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
Ashes 2015: England show the mettle to strike back hard in third Test

England show the mettle to strike back hard in third Test

The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

Charley Hull: 'I know I'm a good golfer but I'm also just a person'

British teen keeps her feet on ground ahead of Women's Open
Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'