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.