Osborne to back bank reforms – but not for eight years

Chancellor pledges to implement Vickers Plan in full in bid to avoid further bailouts

George Osborne will detail plans today for a wide-ranging overhaul of the structure of Britain's major banks, forcing them to split their high street and investment operations.

The aim is to prevent a repeat of the 2008 financial crisis when major banks had to be rescued from collapse by a multibillion-pound bailout from the taxpayer.

The separation – confirmed yesterday by the Business Secretary, Vince Cable – has been resisted by some of the banks which have claimed the shake-up could cost the sector up to £12bn and warned that the bill could eventually be passed on to customers.

There have also been tensions between ministers over whether to press ahead with such wide-ranging reform at a time when the economy is so fragile. However, Mr Osborne will tell MPs today he is implementing the full recommendations of the Independent Commission on Banking, which called for lenders to be forced to create "firewalls" between their retail and investment operations.

The banks will have to put their operations into legally distinct separate arms; exactly what goes into each entity will form the basis of detailed negotiations between ministers, the banks and regulators.

Mr Osborne will also tell the banks that they will have to hold more capital to act as a buffer against future financial emergencies.

Under the Government's plans, the complex legislation underpinning the changes would be passed by 2014-15 and the full separation completed by 2019.

The commission, chaired by Sir John Vickers, was set up to look for ways of making the banking system safer and increasing competition for customers.

Its main proposal was for banks such as Barclays and Royal Bank of Scotland to "ring-fence" retail deposits and business lending from the risky investment operations described by Mr Cable as "casino banking". The idea is also that the state, which guarantees retail deposits, does not indirectly subsidise investment banking. The Treasury is expected to confirm the commission's estimate that the plans could cost banks between £4bn and £7bn, although industry sources put the the cost at £12bn. They have also warned that banks such as HSBC will move their head offices away from the City of London.

Mr Cable told BBC1's Andrew Marr Show yesterday: "Our big banks were at the very centre of the financial crisis ... and it needs reform."

He said: "We can't have a position where the big banks are too big to fail, where there's a taxpayer subsidy, so we're going to deal with that problem."

The Business Secretary added: "It is absolutely right that we make the British economy safe. We just cannot risk a repetition of the financial catastrophe we had three years ago.

"Big structural reform of the banks was something we [the Liberal Democrats] fought for and argued for and now it is going to happen."

Critics will argue that the Chancellor is acting too slowly by delaying separation until 2019, although that was the date suggested in the Vickers report. Chris Leslie, a shadow Treasury spokesman, said: "There must be no foot dragging and no watering down of these reforms. That is why the independent commission should be asked to publish a report in 12 months on what progress has been made in implementing and legislating for these reforms."

But Lord Oakeshott, a former Liberal Democrat Treasury spokesman, said: "The Government's decision to accept the Vickers report and irrevocably break up the banks by 2015 is a triumph for a four-year campaign by Vince Cable and the Liberal Democrats."

Vickers reforms: at a glance

* Banks should ring-fence their high street banking operations to prevent the possibility of contamination by risky "casino" investment arms. The ring-fenced part of the bank should have its own board and should be legally and operationally separate. This reform should be implemented by 2019 at the latest.

 

* The ring-fenced part of the bank should have a capital cushion of 20 per cent of assets, considerably more than demanded at the moment by international capital adequacy rules.

 

* In the event of a bank's insolvency, ordinary savers should be paid back before any other creditors.

 

* Banks should make it easier for customers to switch accounts to their competitors by establishing an industry-wide account redirection service.

Start your day with The Independent, sign up for daily news emails
Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
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?
Independent Dating
and  

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

iJobs Job Widget
iJobs General

Recruitment Genius: Sales Administrator - Spanish Speaking

£17000 - £21000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Sales Administrator - German Speaking

£17000 - £23000 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Sales Administrator - Japanese Speaking

£17000 - £23000 per annum: Recruitment Genius: If you are fluent in Japanese a...

Recruitment Genius: Graphic Designer - Immediate Start

£16000 - £25000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'