U.K. to Force Banks to Separate Consumer and Investment Business

U.K. Business Secretary Vince Cable
U.K. business secretary Vince Cable. Photographer: Chris Ratcliffe/Bloomberg

The U.K. will force banks to separate their investment and consumer businesses as part of its acceptance of the findings of the John Vickers-led Independent Commission on Banking, business secretary Vince Cable said.

“Tomorrow, the government is going to launch this initiative on the banks, accepting in full the Vickers commission,” he told BBC television today. “We’re going to proceed with the separation of the banks, the casinos and the business lending parts of the banks.”

Former Bank of England Chief Economist Vickers recommended in a Sept. 12 report that banks build fire breaks between their consumer and investment banks and boost the amount of loss-absorbing equity and debt they hold to between 17 percent and 20 percent. Since 2007, the government has had to spend, pledge and loan 850 billion pounds ($1.3 trillion) to rescue British banks.

“These are vital reforms to protect taxpayers and consumers in the future, which the government must get on and legislate for rapidly,” lawmaker Chris Leslie, who speaks for the opposition Labour party on financial matters, said in an e-mailed statement. “The independent commission should be asked to publish a report in 12 months on what progress has been made in implementing and legislating for these reforms.”

The announcement comes a week after Prime Minister David Cameron refused to join a European accord to stem the euro region’s debt crisis because it wouldn’t give the U.K. the right to veto future financial regulations. The Vickers proposals are part of the government’s effort to prevent another financial crisis and shield the taxpayer from future bailouts.

‘Too Big to Fail’

“We cannot risk having a repetition of that financial catastrophe that we had three years ago,” Cable said. “We can’t have a position where the banks are too big to fail.”

Chancellor of the Exchequer George Osborne will say in Parliament tomorrow that the government will enact the reforms stemming from the report and the Treasury will publish its response. The changes are to be implemented by 2019.

The units inside the fire breaks will include all checking accounts, mortgages, credit cards and lending to small- and medium-sized companies, the report said in September. As much as a third of U.K. bank assets, or about 2.3 trillion pounds, will be included, the document said. Trading and investment banking activities will be excluded from the ring-fence. Standard & Poor’s said Sept. 14 the elements of a bank outside the ring fence face a credit-ratings cut as they won’t be able to count on government support.

European Accord

Cameron’s rejection of the European accord, which included new fiscal rules, threatened to create a rift in his Conservative-led coalition government as members of the minority Liberal Democrat party claimed Britain will be left out of plans made by the other 26 nations signing the treaty.

Liberal Democrat Cable told the BBC today that he didn’t consider resigning. Deputy Prime Minister Nick Clegg, the minority party leader, told Sky News that cooperation will continue.

“Negotiations broke down and left us in an isolated position, which I couldn’t and don’t welcome,” he said. “There’s no possible salvation for Europe as a whole and no route out of these difficulties we face unless we work together.”

Cameron’s veto has given his party a boost in polls. A survey by ICM for the Sunday Telegraph showed the Conservatives’ lead in voting intentions against the opposition Labour Party widened 2 points since the start of December to 40 while support for Labour dropped 2 points to 34 percent. The six-point lead is the widest since June last year. The Liberal Democrats held at 14 percent. ICM polled 1,008 people from Dec. 14 to 15.

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