George Osborne is to herald a revolution in British banking, endorsing plans to build a capital wall around the country’s high street branches to help protect them in the event of financial crisis.
The chancellor will accept the central recommendation of Sir John Vickers’ Independent Commission on Banking that big diverse banks, such as HSBC, Royal Bank of Scotland and Barclays, should “ringfence” their essential operations — including deposit-taking and payment systems — and inject more capital into them.
Mr Osborne has accepted Sir John’s view, outlined in an interim report in April, that by building a capital buffer equivalent to 10 per cent of risk-weighted assets around those retail banking operations it would be easier to allow riskier investment banking arms to fail without imperilling household savings.
The news weighed on bank shares in early trading on Wednesday, with Lloyds down 0.7 per cent at 48.2p, RBS 0.4 per cent lower at 41.4p and Barclays down 0.8 per cent at 262.7p. HSBC shares were flat at 616p. The FTSE 100 was down 0.2 per cent.
Although Sir John’s final report is not due until September 12, Mr Osborne will use his Mansion House speech to warn Britain’s bankers to stop wasting time opposing the proposal and to start engaging with the complex detail of how the new system will work in practice.
Mr Osborne’s decision to pre-empt Sir John’s report may also partly be politically motivated, since it allows him to steal a march on Vince Cable, business secretary, in showing he can be tough with the banks.
“This is the most far-reaching proposal for high street banking in a generation,” said one aide to the chancellor. “We have done sufficient work on Sir John’s idea to satisfy ourselves it’s a workable model.”
Sir John’s “retail ringfence” concept is his main proposal for how to address the “too big to fail” question, which has dogged regulators around the world since the crash of 2008.
Sir John believes the ringfencing idea would dovetail with other initiatives under discussion at an international level, including plans to require the world’s biggest 25-30 banks to hold extra capital and to devise “resolution” structures that could wind down failed entities.
However, big questions remain about how tightly the ringfence should be drawn and whether funding should be allowed to pass through the barrier, making it difficult for banks to assess the likely impact.
The chancellor disagrees with Stephen Hester, chief executive of RBS, who last week told the Treasury select committee that the concept of ringfencing could prove counter-productive. Creating “a protected beast that the government would support”, Mr Hester said, could incentivise excessively risky strategies within the ringfence to offset the higher capital cost. He also said it could hit bank valuations.
But one Treasury official said: “We don’t necessarily accept that making banks safer reduces their value or some of the figures that have been put about on the cost of this.”