The British government plans stricter banking regulation that would force banks to separate their investment banking operations from those businesses that take deposits.
British Chancellor of the Exchequer George Osborne said on Monday that the government would seek to pass laws by 2015 to strengthen financial regulation as proposed by an independent commission led by John Vickers, a former Bank of England chief economist. The new laws would then apply by 2019 at the latest.
“These are the most far-reaching reforms of British banking in modern history,” Osborne said in a speech to parliament.
The reforms are intended to allow Britain to stay “home to one of the world’s leading financial centers without exposing British taxpayers to the massive costs of those banks failing.”
The new rules represent a bigger change for the banking industry here than the Dodd-Frank overhaul has meant for US banks, some analysts have argued. Under the British regulation, investment banking and retail banking operations would be different legal entities and funded separately.
The rules would also require banks to set aside a slightly bigger capital cushion than required by the Basel III regulations. Only Switzerland had asked its banks to hold more capital to absorb future potential losses so far.
British banks would have to shield deposits of individuals and small and medium-size companies in their consumer bank from investment banking activities, such as trading. This means banks would no longer be able to use deposits to fund investment banking units. Investment banking businesses would also be allowed to fail without affecting the rest of the bank. The new rules would not apply to subsidiaries of non-British banks in Britain.
“Business models need to be fundamentally overhauled,” said Jon Pain, head of financial -services risk consulting in Britain at KPMG.
Major banks should not be “fooled” by the timetable as they “will need to make some serious decisions before June,” he said.
Angela Knight, head of the British Bankers’ Association, played down the impact of the changes, saying that the government’s decision was just “the next stage of a program of reform” and that “banks have already made significant changes to how they operate.”
Some banking executives have argued that the new rules would be expensive for the banks at a time when the industry is already struggling with sluggish growth and volatile markets. Some banks, including HSBC, have previously said they would consider moving their headquarters abroad if the new regulation was too punishing.
Osborne denied on Monday that the rules would make London less attractive as a financial center.
He said the reforms are expected to cost the banking industry as much as ￡8 billion (US$12.41 billion) because banks would no longer benefit from the perceived guarantee that the government would bail them out.
The government asked the Vickers commission last year to come up with proposals of how best to protect taxpayers from having to bail out financial institutions during any future banking crises. Britain’s government spent more than US$1 trillion in bailing out ailing financial institutions during the recent financial crisis and still owns stakes in two of the country’s largest banks, Royal Bank of Scotland and the Lloyds Banking Group.