Banks face major reorganisation

Britain’s largest banks will have until 2019 to implement a radical reform of their operations to prevent another taxpayer bailout.

Britain’s largest banks are to be given until 2019 to implement radical reform of their operations in order to prevent another taxpayer bailout.

The Independent Commission on Banking’s final report has recommended that the retail operations of banks should be ring-fenced from investment banking but has allowed some movement over where the ring-fence will be drawn.

The much anticipated report by Sir John Vickers admitted that its proposed reforms would cost between £4bn and £7bn but were more practical and less expensive than the full-scale separation that business secretary Vince Cable had called for.

The ICB conceded that its reforms were “deliberately composed of moderate elements” but insisted “the reform package is far-reaching” and it would “make it easier and less costly to resolve banks that get into trouble”.

George Osborne welcomed the report stating, “The government will now get on with implementing the report.” He pledged that legislation would be passed before the end of this parliament, but that he would give banks the timeframe recommended by Vickers.

Up to £2tn of assets could end up inside the ‘firewall’ – including all domestic high street banking services – as the ICB said that the aggregate balance sheets of the UK’s banks was over £6tn and that between one sixth and one third of this should be protected from investment banking operations.

While the ICB made it clear that the current crisis in the eurozone should delay the reforms, it also set a deadline of 2019 for implementation of the changes to coincide with the international capital rule changes being introduced by regulators in Basel, Switzerland.

The ring-fencing is expected to have the biggest implications for Barclays and Royal Bank of Scotland.

Under the proposals released today, the subsidiaries would operate under different governance structures. The report outlines that, “The Commission’s view, in sum, is that domestic retail banking services should be inside the ring-fence, global wholesale and investment banking should be outside, and the provision of straight forward banking services to large domestic non-financial companies can be in our out.”

The Commission also recommends that, in the event of a bank’s insolvency, compensating depositors up to the Financial Services Compensation Scheme limits should be given a higher priority than other unsecured debt.

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