Chancellor George Osborne is to force banks to ring-fence their retail operations from investment banking.In a speech on Wednesday he will say banks must be set up so that their branches and public savings and loans would not be damaged if their trading arms ran into trouble.The legal separation of the functions of big banks was recommended by the Independent Commission on Banking.He will also announce the privatisation of Northern Rock.The former mutual was nationalised in February 2008, in the early stages of the financial crisis.In his annual Mansion House speech, Mr Osborne will also say that banks will have to hold more capital to protect themselves against future losses than the new international minimum of 7%.He will not put a figure on what minimum he will impose, but Treasury sources said that 10% would be “the right ballpark”.The 10% minimum was another recommendation of the Independent Commission on Banking (ICB) in its interim report in April.At the time, Mr Osborne welcomed the report, but has not previously endorsed its findings.The Commission’s final report, which is expected to give details of how banks’ firewalls will work, is due to be published on 12 September.The chancellor will announce in his speech how he plans to relinquish state control of Northern Rock.
The former mutual has been split into a “good bank”, containing customers’ savings and about 70 branches, and a “bad bank” containing the more toxic loans.The former will be sold, while the latter will continue to be owned by the Treasury.BBC business editor Robert Peston said: “The minutiae of how retail banking operations are to be insulated from investment banking are yet to be worked out.”The practical and legal challenges are formidable.”Stephen Hester, chief executive of the semi-nationalised Royal Bank of Scotland, told MPs last week that putting retail banks into separate subsidiaries could increase the riskiness of the banking system and put up costs for banks and their customers.But the boss of HSBC, Doug Flint, told the same committee hearing that ring-fencing was a good idea. – BBC
