Chancellor George Osborne has endorsed the preliminary proposals of the Independent Commission on Banking, leaving banks in little doubt they will have to separate their retail and investment activities.
At his Mansion House address in London last week, Osborne said increased capital requirements and ringfencing retail banks would make them safer. He said: “The ICB has put forward two particularly important proposals. Bail-in instead of bail-out, so private investors, not taxpayers, bear losses if things go wrong. And a ringfence around better-capitalised high-street banks to make them safer and to protect their vital services to the economy if things go wrong. I have told the commission the Government endorses both these proposals in principle.”
Cicero Consulting director Iain Anderson says: “Osborne is clear he wants this to happen and financial institutions are going to have to get on with making it work.”
The big four banks have been divided over the proposal.
Lloyds Banking Group’s submission to the Treasury select committee’s inquiry into the ICB report said the ringfencing proposal could bring substantial social benefits but warned important details on the ringfence boundary must be decided carefully so as not to affect the availability or price of credit.
At a recent Treasury select committee hearing for the same inquiry, HSBC chairman Douglas Flint agreed that ringfencing is required but Royal Bank of Scotland chief executive Stephen Hester refused to support the idea. He said: “Creating a ringfence increases some of the systemic risk and decreases the ability of banks to withstand the risk and has significant cost to it.”
Barclays chief executive Bob Diamond says: “While ring-fencing would not be our first option, we can see ways it would work.”
The ICB will make its final recommendations in September this year.