UK government to back ring-fencing of banks

Chancellor George Osborne is expected to reveal plans to ringfence retail from investment banking and announce the privatisation of Northern Rock in his Mansion House speech tonight.

The lengthy debate about the merits and challenges of so-called narrow banking, is reportedly due to end with the Chancellor announcing the forced separation of functions.

This is in line with the recommendation of the Independent Commission on Banking (ICB) and has been a long-held position of business minister Vince Cable.

"The problem with this is while it is intellectually a sound move, the problem is that in practice, with the pressures of the real world, the ring-fence will not actually - to mix metaphors - be completely watertight. It might break down. It's very difficult when you've got the same management, the same board, the same group of shareholders," Osborne told BBC Radio 4's Today programme.

But such significant reform would need more debate, the banks claimed on Wednesday morning.

"There are a lot of issues and a lot of details that need to be thought through and need to be discussed," British Bankers' Association chief executive Angela Knight told BBC Radio 4.

The banks themselves have appeared split on the concept.

In his evidence to the Treasury Committee last week, Royal Bank of Scotland chief executive Stephen Hester told MPs 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 committee he thought that ringfencing was a good idea.

Even the full details of the ICB's proposals, which were released in short form in April, will not be known until its full report is released on 12 September.

Banks are also expected to be set higher Tier-1capital reserves by Osborne, who is expected to announce that the new international minimum of 7% should be increased to around 10%, again in line with ICB recommendations.

Shares in Britain's main banks slipped into the red on the news, with Barlcays - perhaps with the most to lose from narrow banking - dropping 1.7% in morning trading. RBS was down 1.3%, while Lloyds Banking Group fell 0.5% and HSBC dropped just under 1%.

The chancellor's plans for Northern Rock, which was brought under state control in February 2008, are expected to see the 'good bank' element sold while the 'bad bank' remains taxpayer-owned.

This article was written for Interactive Investor

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