UK Backs Break-Up of Banks that Fail to Reform

Last Updated: 5, February 2013

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UK Chancellor George Osborne said on Monday that taxpayers will not have to pay for the mistakes and failures of the financial industry, as he pledged to split up big banks that fail to abide by new rules to “ring fence” risky investment activities.

Presenting the Banking Reform Bill on Monday, Osborne declared “2013 the year we reset our banking system” and laid out four “concrete things” that will redefine the rules of banking, including the separation of High Street activities from the dealing floor to protect taxpayers from bailing out banks that had become “too big to fail”.

Building on the recommendations of the 2011 Vickers report on banking, the new law will also empower the authorities to “electrify the ring fence” around “core” retail banking businesses if banks refuse to separate high-risk “casino operations” from savers’ deposits. Regulators will then review the entire UK banking industry each year to determine whether the ring-fence is proving effective.

The annoucement puts the Finance Minister on a collision course with some of Britain’s biggest banks, which claim the legislation, due to be law within a year, would make London less attractive as a global financial centre.

“This will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses,” said Anthony Browne, chief executive of the British Bankers’ Association. “Above all, what banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow.”

But Osborne delivered a stern warning that the banks could not be trusted:

[quote] Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place. [/quote]

He added that once the spotlight had moved away from the banks, they would be likely to try to soften the regime. “At that time, banks could be particularly active in testing the ring-fence and lobbying politicians to alter its design for their benefit. Electrification creates incentives against such behaviour,” Osborne predicted.

Osborne also said he was overhauling the regulatory system to give the Bank of England more powers, examining the culture and ethics of banking, and seeking to improve competitiveness by making it easier to switch bank accounts.

London’s structural reforms go deeper than Germany and the United States’, which are only demanding that banks separate out their proprietary trading, where they invest the banks’ own funds, from the rest of their businesses.

Germany is however considering a new law that would see executives jailed for up to five years if found guilty of reckless behaviour that jeopardises their bank, a move described by a senior government source in Berlin as a signal to Europe, which is seen as not moving fast enough on the issue.

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