UK Banks Get £100bn Credit Injection, as ICB Reforms Rubberstamped

Britain’s banking system is set to benefit from an injection of more than £100bn (US$155bn) from the government via the Bank of England (BoE). At the same time the UK Chancellor, George Osborne, also revealed at the Mansion House speech that it will broadly support the reform of the UK banking system post-crash outlined in the Independent Commission on Banking (ICB) recommendations, which have largely been rubberstamped.

Mervyn King, governor of the BoE and chairman of the Monetary Policy Committee, indicated in his own speech at the annual Mansion House address that policymakers are eager to pump credit into the UK’s ailing financial sector in an attempt to boost liquidity, business activity and stimulate the economy.

During his annual keynote address to bankers at the Mansion House in the City of London, King indicated the £100bn Long-term Refinancing Operation (LTRO), which apes the European Central Bank’s (ECB) own LTRO programme, has been designed to ensure that UK financiers are meeting the level of demand for loans from businesses and consumers.

Notoriously, the banking industry has so far been accused of hoarding too much of the support provided by the earlier quantitive easing (QE) programme run by the BoE, which is effectively printing money, which hasn’t found its way down the chain to businesses that need support, instead often being held against bank’s capital adequacy requirements or used on speculative investments.

In addition to the UK LTRO programme, the BoE will also activate its emergency liquidity scheme to provide instalments of six-month liquidity worth £5bn every month to lenders.

“The black cloud [hanging over the eurozone] has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead,” said King.

Analysis: ICB Banking Reform Rubberstamped

Meanwhile, the UK Chancellor George Osborne has pledged that the government
will press ahead with its plans to ring-fence the high street and investment
operations of UK banks. The plans outlined in the Vickers report produced by the
ICB last year are generally being rubberstamped, although some exemptions are
going to apply around leveraging with a reduction to approximately 30% in the
mutliples, less than was originally envisaged. 

Also addressing the Mansion House audience of senior financiers, Osborne,
still insisted, however, that the UK government will not bow to pressure from
the City and will press ahead with the vast majority of the proposals put
forward in the ICB’s report last year. As it is Sir John Vickers’ report has
already shied away from introducing a transatlantic version of the old US Glass
Steagall Act, which fully separated investment and retail banking operations
after the 1929 crash, in favour of a mere ring-fence, so any further watering
down may cause political problems.

The Vickers report recommends that the high street operations of major UK lenders should be ring-fenced from their investment banking arms in order to protect retail customers’ money, with cross-subsidies banned.

Osborne stated at the Mansion House that the Conservative-Liberal Democrat alliance will follow Vickers recommendations by “fundamentally reforming the structure of our banking sector”, in order to make sure taxpayers do not have to foot the bill in future bailouts should things go wrong. “We will be able to bail in creditors when a bank fails rather than turning to the public purse,” he noted.

Vickers’ himself has already warned the government not to give in to City lobbying ahead of the whitepaper that will enact the proposed banking reforms.


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