Osborne plans to ‘re-set banking system’

Trust breaks down between Westminster and lenders

George Osborne will on Monday hail 2013 as “the year we re-set our banking system”. But any prospect of a fresh start has been soured by an almost complete breakdown in trust between Westminster and the banks.

The chancellor will set out his vision for financial services in a speech at JPMorgan’s back office operation in Bournemouth – a venue chosen because it symbolises the vital role played by banks far beyond the City.

Mr Osborne will stress his support for the industry and say that 2013 could be a turning point for a sector disfigured by years of excessive bonuses, the scandal over the rigging of the London interbank offered rate, IT failures and the mis-selling of products.

This year is pivotal. Mark Carney, the incoming Bank of England governor, is to take charge of a new regulatory system in the summer and will set out his thoughts when he appears before the Commons Treasury committee on Thursday.

A new competition regime, which will make it easier for customers to switch accounts, will take effect in September, while a banking reform bill published on Monday will introduce reforms to make the sector safer.

But the sins of the past continue to put a cloud over the future. After last week’s headlines about the mis-selling of complex interest rate swaps to small companies, Royal Bank of Scotland faces a fine this week for its part in the Libor-rigging scandal.

“The anger people feel is very real,” Mr Osborne will say. “Let’s turn that anger from a force of destruction into a force for change: change that will give us a banking system that will work for all of us.”

At the heart of his new speech is a warning to the big universal banks that he will break them up unless they comply with new rules to make the sector safer and protect the taxpayer.

The banks are furious. The British Bankers’ Association said: “No other major economy is considering moving away from the universal model of banking because it undermines banks’ ability to provide all the services businesses need.

“Above all, what banks and business need is regulatory certainty so that they can get on with what they want to do, which is help the economy grow. This decision will damage London’s attractiveness as a global financial centre.”

The chancellor had not intended to leave the threat of banking separation hanging over the banks precisely because he wanted to “re-set” the industry on a stable new footing.

Vince Cable, business secretary, who has worked remarkably harmoniously on banking reform with the chancellor, has warned about the risk of “creating further massive uncertainty” if the whole bank reform agenda was reopened.

But in the end they had little choice once Andrew Tyrie’s parliamentary banking commission concluded that the banks were so untrustworthy that only the threat of an ultimate sanction of dismemberment might persuade them to stick to the rules.

The banking reform bill will therefore implement the ringfence model proposed by Sir John Vickers – isolating retail and small business banking from riskier investment operations – but with the threat of full separation if the ring fence is not respected.

“The government is doing something they don’t believe in for political expediency,” a senior banker said. Mr Osborne might reflect that the banks have only themselves to blame: it was not he who dragged the banks into the political arena. Re-setting relations is not going to be easy.

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