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Banking reforms: Osborne supports 'robust ring fence'

In a white paper published today the government has set out how it intends to make the banking industry safer and more compeitive.

 
Banking reforms: Osborne supports 'robust ring fence'

Chancellor George Osborne has committed to enforce the separation of banks’ risky investment activities from more traditional personal and business lending in a bid to prevent a repeat of ‘the worst crisis in a generation’.

In a white paper today the government explained that ring-fenced banks will be prohibited from conducting the vast majority of international wholesale and investment banking. This will not stop a bank from failing, but will ensure the essential parts of the banking system – deposits and overdrafts – can continue without the need for a taxpayer-funded bailout.

Osborne has, however, agreed to widen the range of activities allowed within the ring-fenced operations to include ‘simple hedging products’ – such as protection against interest rate and currency fluctuations – to ensure small businesses have access to essential banking services. However these products must be provided in a way that does not expose the bank to increased market risk.

This is a significant concession to the banking lobby, which has fought hard to dilute the ring fencing proposals made by the Independent Commission on Banking (ICB) in its final report last September.

Mark Hoban, financial secretary to the Treasury, meanwhile, added that smaller banks, with under £25 billion worth of deposits, will be exempt from the ring fence requirements.

'Large, systemically important banks have a competitive advantage from the perceived implicit guarantee. Our targeted reforms remove that advantage, helping smaller banks and new entrants,' he explained.

The government has, however, raised the question as to whether ring fenced banks should be allowed to offer simple retail investment products. Many of the structured investment products, which are supposed to be a simpler alternative for high street investors, currently offered by banks are complex and risky in nature, which would go against what the government is trying to achieve by splitting retail and investment banking.

In its white paper the government also confirmed that savers will be given greater protection should a bank fail. At present bondholders are first in line for compensation, but the ICB’s proposals will see individual deposit holders ranked above bondholders in the event of a collapse.

The banking industry argues the move will lead bondholders to demand higher interest rates and result in increased borrowing costs for both individuals and businesses.

Richard Lloyd, executive director of Which?, however, said: 'Never again should consumers have to foot the bill for a banking bailout that last time cost every man, woman and child £2,000'.

The government also confirmed its support for:

  • making it easier and quicker for customers to switch current accounts;
  • improving transparency across all retail banking products;
  • ensuring the sale of Lloyds’ 632 branches leads to the emergence of a strong 'challenger' bank;
  • and increasing banks’ loss absorbing capacity.

New liquidity rules will require large banks to have at least 10% equity capital – some 3% more than the new international 7% minimum – as a safety net for future crises.

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8 comments so far. Why not have your say?

David Strachan

Jun 14, 2012 at 18:01

The advise that the high street banks give is generaly usless.

Use a broker and I do not mean a bank broker.

David

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Chris Clark

Jun 14, 2012 at 18:02

We should work a bit harder to ban casino operations from SME businesses. They still are trying to get interest rate hedging approved, and SMEs are saying they were forced to by hedging protection against interest rates going UP, when the banks knew the rates would tumble, causing hugely inflated highly profitable payment demands.

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Kenpen2

Jun 14, 2012 at 18:25

Huh. The knee-jerk 'elf-'n-safety response applied to banking. Something somewhere goes wrong once and there's an over-the-top response involving bureaucrats and red-tape to make things more difficult / expensive for everyone for evermore.

Plenty of evidence here of the law of unintended consequences :

1. << In its white paper the government also confirmed that savers will be given greater protection should a bank fail. At present bondholders are first in line for compensation, but the ICB’s proposals will see individual deposit holders ranked above bondholders in the event of a collapse.

The banking industry argues the move will lead bondholders to demand higher interest rates and result in INCREASED BORROWING COSTS for both individuals and businesses.>>

2. << Critics, however, still claim the new liquidity regulations will hamper banks’ incentives to lend.

Matthew Fell, of employers' organisation the CBI, said: 'The proposals for additional capital requirements are above and beyond those already agreed internationally, which will make it HARDER FOR BANKS TO LEND to businesses'.>>

Agree some additional oversight is necessary - maybe a return to the supervisory regime which existed before NuLab loosened all the controls ?

It's worth remembering that, even in such a major financial crisis, most of our big banks (HSBC, Barc, Std Chartered and, until shafted by GBrown, Lloyds) did or would have come through on their own. Only the Scottish banks were unduly reckless, they and some of the smaller players whose cause is now promoted in the name of "competition".

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merchant_adventurer

Jun 14, 2012 at 18:29

Absolutely they should be banned. When we choose to invest in funds etc we at least have some understanding that there is risk associated.

Similarly if they want to "borrow" my money then I would be happy to charge them a reasonable return for the risk.

As it stands all understanding and balance of risk and reward has gone out of the window. Using someone else's money but being handsomely remunerated regardless is just daylight robbery.

My take on the recent JP Morgan fiasco is that once an invested and disproportionate return has been identified then there is no true risk assessment undertaken these days instead "traders" are looking to balance the risk with an equally high risk counter investment.

Despite the presumed cream of the mathematical crop the downfall of the credit crunch was the inability to assess risk because they didn't believe there was any and therefore taking out a ludicrously low "insurance" premium was purely ticking a box.The "premium" being derived from a finger in the air because the whizz kids couldn't assess or believe it could happen.

There is no other word for it than Casino gambling.

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Franco

Jun 14, 2012 at 20:03

But if we do not let the bankers do hat they want, they will relocate to Timbuktoo. Is that not what our politicians usually tell us?

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Chris Clark

Jun 14, 2012 at 20:12

Perhaps a referendum is needed Franco.

Motion: "Do the British people wish our banks to relocate to Timbuktoo?"

Votes for:

Votes against:

Any Citywire folk want to give us an early indication?

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Steve Hayes

Jun 14, 2012 at 23:19

I vote Timbuktoo

I keep harping on about it, but what they do in Brail is they have a law, if a bank goes bust then so do its directors (even if it's not possible to prove they were to blame, which translates as they cannot lawyer their way out of it). Because if the directors walk away rich, then logically they would be right to do their utmost to get big bonuses for short term gambles. If the directors care they'll soon work out how to make sure they stay solvent.

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purplelite

Jun 15, 2012 at 09:16

Sounds reasonable to me Steve.

My father once said to me "never trust a financial institution". I have stuck by this advice and have not regretted it.

If directors financial worth is in line with the company financial worth then I think my fathers advice could be less true.

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