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UK Chancellor backs bank break-up regulations

Banks to be separated if they fail to follow new rules

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The UK’s major banks would be broken-up if they fail to follow new government regulations on ring-fencing risky investment operations from their retail banking arms, according to Chancellor of the Exchequer George Osborne.

In a speech in London, Osborne said taxpayers’ anger at behaviour in the banking sector was justified and they should never be expected to bail banks out. He made the comments in wake of the introduction of the Banking Reform Bill in Parliament.  

Under the new regulations, investment and High Street banks will also have different chief executives. Furthermore, the bill would allow customers to be able to switch bank accounts to a rival within a week.

The move sees Osborne in broad agreement with the Independent Commission on Banking, led by Sir John Vickers in 2011, which had concluded that ring-fencing was the best way to protect retail banking activities from any future investment banking losses.

Osborne said the time had come to turn public anger at banks "from a force of destruction into a force for change".

"When the financial crisis hit, the fire was then so great that the whole economy was sacrificed to put it out. The British people need to know that lessons have been learnt. And they have," he added.

"Not just RBS on the High Street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai. I want to make sure that the next time a chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail," Osborne concluded.

In tandem with Osborne’s comment, the Financial Services Authority (FSA) is being replaced by two bodies. The Prudential Regulation Authority, under the Bank of England, will regulate financial firms while the Financial Conduct Authority (FCA) will oversee consumer protection. Mark Carney, the incoming governor of the Bank of England, will have a much wider remit than his predecessor Sir Mervyn King.

However, Anthony Browne, chief executive of the British Bankers' Association, said the legislation would 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.”

Iain Coke, head of ICAEW’s Financial Services Faculty, said if the government were to ring-fence banks then it will not solve all the problems.

“Big banks may still need a government bailout in the future to protect the system. Ring-fenced banks will still be able to carry out a range of risky activities including having sub-prime mortgage books and property punts. Non-ring-fenced banks will still provide economically essential functions,” he added.


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