Your banking reforms do not go far enough, Osborne told

Commissioner appointed to recommend changes criticises Chancellor's conclusions

The Treasury's reforms of the financial system do not go far enough and are at risk of being watered down further by lobbying, according to the Government's own Independent Commission on Banking. Sir John Vickers, who chaired the Commission, said that yesterday's White Paper, which will ring fence banks' high- street operations from their casino trading arms, should have imposed tighter limits on banks' own borrowing limits, or "leverage".

Sir John said: "The White Paper proposals are far reaching, but on some points – such as limits on the leverage of big banks – we believe they should go further."

Last September the ICB said that the UK's biggest banks should have a minimum level of capital in relation to assets of 4 per cent, more than required under the international Basel rules, which have set a target of 3 per cent.

The Vickers commission argued that "the Basel baseline is by some margin too low". However, yesterday's White Paper says that the Government will go no further than Basel in requiring banks to hold more capital. Sir John also warned that the reforms are in danger of being further watered down by intense lobbying from the financial sector, saying that the committee would "urge the Government to resist pressure to weaken their effectiveness". This echoes the words of Robert Jenkins, a member of the incoming new financial super-regulator, the Financial Policy Committee, who argued last year that the 2019 deadline for the implementation of the ring fence is so distant that it will "allow lobbyists to chip away until the proposal becomes both unrecognisable and ineffective".

Yesterday's White Paper proposed a hole in the ring fence, to let retail banks sell potentially risky financial derivative products to small businesses customers. This concession is something Lloyds and Santander pressed for.

Unveiling the White Paper yesterday, the Financial Secretary, Mark Hoban, told the House of Commons that the Government was "determined to take action to deliver a stable banking sector that underpins, not undermines, economic growth". He added that the reforms would ensure that "investors reap rewards when banks do well but take the pain when banks fail".

However, Labour's shadow Chancellor, Ed Balls, said that the Government had watered down the reforms. "Isn't the truth that having failed to deliver international agreement on tougher international banking standards, the Chancellor is now being forced to water down and fudge the Vickers' reforms?"

The Treasury estimated that the cost to banks of the reforms in the White Paper would be £4bn to £7bn per year. However, it said that this would be offset by average annual benefits to the British economy from the lower future likelihood of banking crisis of £2bn to £9.5bn.

Despite the Government's commitment to the Basel capital regime, in his Mansion House speech last night, the Governor of the Bank of England, Sir Mervyn King, hinted that the Bank might still impose capital ratios higher than the Basel minimum. He noted that in the 2008 financial crisis "the Basel ratios proved a poor predictor of bank failures" and added that "simple leverage ratios will also play a key part in our assessment of risk".

The White Paper will make ring-fenced banks economically and legally separate from the rest of the financial group. This would enable the authorities to intervene without being forced to bail out out the casino investment banking operations of the group.

Held to account: Banking proposals

Ring fence

The high-street arms of banks will have to be made easily separable from their casino trading arms so the authorities can rescue the former in a crisis without having to bail out the entire operation. But the White Paper would exempt small UK banks from the need to set up the ring fence.

Derivatives

The White Paper proposes to allow banks within the retail ring fence to continue to sell interest-rate and currency derivatives to small-business customers. But many firms say they have been mis-sold these sort of risky products in recent years.

Capital buffers

The Vickers report said that banks should have a minimum of 4 per cent equity. But the Basel Committee, which sets international capital rules, says the minimum should be 3 per cent. The White Paper says that the Basel minimum should apply. The overseas operations of banks will also be excluded from being forced to hold the additional capital buffers recommended by Vickers.

Depositor preference

Vickers recommended that ordinary savers should be first in the queue to get their money back when a bank gets into trouble. The White Paper proposes to follow through on this, despite rumours it might be dropped.

Competition

Vickers said it should be made easier for customers to switch their accounts between banks to increase competitive pressures. The White Paper proposes to ensure banks facilitate this swapping. But it does not propose to impose a system of full account portability, which would make changing accounts as simple as changing phone network providers.

Ben Chu