Government accepts Vickers banking reforms

Mr Osborne toldl MPs he accepted the recommendations of Sir John Vickers’ Independent Commission on Banking (ICB), which was set up after RBS and Lloyds had to be bailed out by the taxpayer during the 2008 credit crunch.

He said RBS, which is 83 per cent owned by the taxpayer, would make further reductions in its investment business so it could become “a stronger, safer bank, able to maintain lending to businesses and consumers”.

Costs

The Chancellor said the changes would cost the banking industry £3.5-8bn and lead to a reduction in national output of £0.8-1.8bn. But he added that these sums would be “far outweighed” by the benefit to the economy of avoiding future financial crises, which he said would reach £9.5 bn a year on “modest” assumptions.

Legislation to ringfence retail banking would pass through parliament by 2015, with other changes implemented by 2019.

Our objective is to make sure what happened in Britain never happens again. Chancellor George Osborne

Under the reforms, the deposits and overdrafts of ordinary consumers and small businesses will be handled only by ringfenced banks, which will be banned from involvement in risky investment activities.

Legally independent

The retail banks will have their own boards and be legally and operationally independent from the rest of their corporate groups, with limits on the amounts they can lend to the rest of the group.

Larger retail banks will need to hold more capital to protect themselves from future shocks and customers will be able to swtich bank accounts within seven days, with all direct debit and credit arrangements going with them for no extra cost.

‘Far-reaching reforms’

In a document also signed by Business Secretary Vince Cable, Mr Osborne said the changes amounted to “the most far-reaching reforms of British banking in our modern history”.

He told MPs: “Our objective is to make sure what happened in Britain never happens again, that taxpayers are protected and that customers get a better service.

“We want to separate high street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.”

Regulation

Shadow Chancellor Ed Balls said Labour had apologised for failing to regulate the banks properly, adding: “In that same cross party spirit, perhaps you would take the opportunity to apologise for the role your party played in opposition and the part you played as shadow chancellor in complaining of too much regulation.

“We all made mistakes and perhaps this Chancellor – who opposed financial regulation legislation, opposed the nationalisation of Northern Rock, RBS and Lloyds, not to mention Bank of England independence, should show a little more humility as well.”

Mr Balls said it was vital the the government implemented the reforms “without backsliding, foot dragging or watering them down”.