Osborne set to agree to ICB proposals and split up UK banks
Monday, 19 December 2011 08:20
The government will accept all of the recommendations of Sir John Vickers Independent Commission on Banking (ICB) in what could result in fundamental reforms to the banking industry in the UK.
George Osborne, the Chancellor will present his view to parliament tomorrow on how to implement the reforms and to the dismay of banking lobbyists it is expected that Mr Osborne will accept in full the recommendations contained in Mr Vickers report. Business Secretary Vince Cable told the media yesterday that the government will accept the proposed reforms in full.
This is likely to result in the riskier investment side of banks' business, dubbed "casino banking" separated from the retail arms of the business.
The reforms are expected to cost the banking industry in the region of £5 billion to implement. In December 2010 the National Audit Office reported that the cost of bailing out UK banks to the taxpayer had fallen from a peak of £955 billion down to £512 billion. Additionally, the National Audit Office review found that the Treasury pays £5 billion a year in interest on the loans it took out to bail out the banks.
Perhaps the most fundamental recommendation to emerge from the ICB’s report is the proposal of splitting up the retail and investment arms of banking operations. However, the time limit on when banks have to complete this task by has been extended until 2019 after lobbying from the banking industry.
The Chancellor is expected to defend this delay by saying that this means that UK law becomes aligned with the timetable for implementing banking reforms introduced under the international Basel 3 banking reforms.
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Senior bankers believe the reforms including ring-fencing proposals and the requirement that banks take out bonds to insure them from the need for another bailout will cost the banks more than the £5 billion estimated by the Vickers report.
One refprm that the banking lobbyists may have had some success on negotiating on is the proposal that the biggest UK banks should have enough capital and loans to act as capital buffers that cover twenty per cent of their entire global balance sheet in the event that they need to cover losses.
It has been reported that HSBC may have had some success in getting this part of the reforms watered down as it would be dispropotionately expensive for HSBC to do so as its operations are much bigger outside of the UK.
These bonds will affect HSBC and Standard Chartered more than other banks operating in the UK as their businesses have more exposure to emerging markets and are funded more by deposits than borrowing short-term through the money markets.
The issue is part of the reason HSBC has said it may review whether it continues to base its operations in the UK. HSBC has said that the cost of holding these “bail in” bonds will be £2.5 billion, though this figure is disputed.
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