Osborne’s electrifying threat to break up banks

The chancellor announced plans today to break up Britain’s biggest banks if they flout new rules put in place to prevent another taxpayer bailout.

Under new legislation banks could face complete separation if they fail to divide their high street branch operations from the dealing floor. The new rules will ensure risky operations are ring-fenced away from savers’ deposits.

The banking reform bill will give the government and a new banking watchdog powers to “electrify the ring-fence” if banks fail to comply. Mr Osborne said in a speech at JP Morgan in Bournemouth there would be no more “too big to fail”.

The move comes after the Parliamentary Commission on Banking Standards, set up in the wake of the Libor rate rigging scandal, called for a reserve power for full separation if banks did not implement the reforms.

Mr Osborne warned the commission against “unpicking the consensus” over reform proposals in the bill in November but has heeded warnings that loopholes could easily develop.

Sir John Vickers, who chaired the Independent Commission on Banking, has also said he “would not resist” a complete break up of banks if so-called ring-fencing fails to achieve its desired effect.

The announcement will now put the chancellor on a collision course with the banks, which claim the legislation will damage London’s status as a global financial centre.

Anthony Browne, chief executive of the British Bankers’ Association, said: “This will create 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.”

“Above all, what banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow.”