UK Chancellor Supports Bank Break-up Powers

UK chancellor of the exchequer, George Osborne, has warned the country’s major banks that they face “complete separation” if they fail to adhere to new rules to ring-fence their riskier investment operations from their high street activities. The new rules could mean higher operating costs and less money to lend to corporates, warn the banks.

Osborne was launching the Banking Reform Bill, at which he will said that taxpayers are angered by the banks’ behaviour in recent years and the need to bail out those deemed “too big to fail”. The new legislation will give the UK government and the planned new watchdog later this year the Prudential Regulation Authority (PRA) powers to “electrify the ring fence” if banks fail to separate branch operations from the dealing room floor.

The chancellor has accepted a major recommendation of last year’s Parliamentary Commission on Banking Standards (PCBS), which last month said a reserve power to enforce the ring fence was needed to ensure that reform was implemented.

Osborne’s speech was given at JP Morgan’s administration offices in Bournemouth, UK. In it, he suggested that it was time to turn public anger at the banks’ conduct “from a force of destruction into a force for change.”

“When the [financial] crisis hit, the fire was then so great that the whole economy was sacrificed to put it out,” Osborne said. “The British people need to know that lessons have been learnt. And they have.”

According to Osborne, his predecessor as chancellor, Alastair Darling, was forced to provide state funding to support Royal Bank of Scotland (RBS). “Not just RBS on the High Street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.

“I want to make sure that the next time a chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail.”

Osborne also announced government plans to intervene in the UK payments system to speed up cheque clearing for ordinary customers and make it easier for new banks to compete with established ones. Drawing an analogy between the payments system and telecoms and power networks, he suggested that the structure is too heavily dominated by the UK’s ‘big four’ banks, which that handle 75% of all current accounts. New entrants cannot automatically join the system but must instead seek access via an established rival.

“Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days?” Osborne asked. “The system isn’t working for customers, so we will change it.”

The speech was criticised by Anthony Browne, chief executive officer (CEO) of the British Bankers’ Association (BBA), who said that the new legislation created “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.” He added that it would also undermine London’s position as a leading global financial centre.

Tony Anderson, a partner in the banking team at international law firm Pinsent Masons commented: “The UK is currently the only jurisdiction in the world which is specifically ring-fencing retail banking activity from other banking operations. Other jurisdictions are focussing on separating only certain parts of investment banking activity such as the trading of the bank’s own assets.” The US has banned prop trading.

“These measures will only reinforce this differentiation making it harder for universal banks with global operations to continue to maintain the same operations in the UK in an already difficult trading environment. Creating synergies will be a problem.”

Selwyn Blair-Ford, gtnews contributing editor and head of global regulatory policy at Wolters Kluwer Financial Services, commented: “George Osborne’s statement regarding the ring fencing of investment banking and the threat of a break-up of the financial institution if it does not comply, re-emphases the political intention that the ring fencing reforms will hold.

“The statement changes little for banks as they are all still obliged to adhere to the regulations as they are implemented. It will also not come as a surprise to regulated firms as this and other measures surrounding the ring fence have been discussed for some time. The real significance for financial firms is in the tone adopted during the announcement. It is clear that there is still a strong appetite to implement this and further reforms, despite the banking sector and their regulators considering and implementing regulatory reforms for the past four years.

“The real lesson for financial firms therefore is that despite Basel III, the Independent Commission on Banking (ICB) report on banking and the introduction of new regulators amongst others, the probability of further regulatory initiatives is high. Keeping abreast of these changes will not become any easier in 2013. It is essential that firms make sure they are able to properly adapt to the changes in a timely manner. This includes having the right understanding and expertise of the regulations as they evolve and having flexible and appropriate technology infrastructure.” 

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