Osborne to Pledge U.K. Bank Legislation for Vickers Plan by 2015

U.K. Chancellor of the Exchequer George Osborne
George Osborne, U.K. chancellor of the exchequer. Photographer: Simon Dawson/Bloomberg

Chancellor of the Exchequer George Osborne will pledge today to pass laws by 2015 to force banks to separate investment and consumer businesses, giving full backing to the recommendations of the Independent Commission on Banking.

Osborne will promise that new rules will be operational no later than 2019, as he seeks to solve what he has called the “British problem” of having to use taxpayers’ money to bail out the financial sector. The solution proposed three months ago by the panel led former Bank of England Chief Economist John Vickers is for banks to build firebreaks between their consumer and investment operations and boost the amount of loss-absorbing equity and debt they hold to between 17 percent and 20 percent.

“The government is going to launch this initiative on the banks, accepting in full the Vickers commission,” Business Secretary Vince Cable, who helps Osborne set bank policy, told BBC television yesterday. “We’re going to proceed with the separation of the banks, the casinos and the business-lending parts of the banks.”

Osborne will outline to lawmakers in London this afternoon the details and timetable of how the government will implement Vickers’s Sept. 12 proposals amid complaints from lenders that the new rules will hit their profitability. The government’s costs and liabilities for bailing out troubled banks have reached 850 billion pounds ($1.3 trillion) since 2007.

Spending Cuts

That’s put pressure on Prime Minister David Cameron’s government, which is also driving through the biggest public-spending cuts in more than half a century because of the financial crisis, to convince voters that it can tame banks’ excessive risk taking and control high pay in the City, London’s financial district, as living standards elsewhere in the country decline.

“This is an acid test of the government’s willingness to take on the vested interests of the City in the wider public interest,” David Hillman, a spokesman for the Robin Hood Tax campaign, a group of charities including Oxfam that want a tax on financial transactions, said in an e-mail.

The Vickers proposals are part of the government’s effort to prevent another financial crisis and shield the taxpayer from future bailouts.

“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.”

Chris Leslie, who speaks for the opposition Labour Party on financial matters, called for annual progress updates by Vickers on whether the government is implementing his proposals properly.

Bank Regulation

Separately, members of both houses of Parliament said today the government “must significantly amend” its draft Financial Services Bill, which returns powers to the Bank of England to police banks.

In a report published in London, a committee of lawmakers said the central bank needs to become more accountable to Parliament and should hand power to the chancellor as soon as taxpayers’ money is needed in any future bank rescues.

Vickers proposed that the units inside the firewalls will handle all checking accounts, mortgages, credit cards and lending to small- and medium-sized companies. As much as a third of U.K. bank assets, or about 2.3 trillion pounds, will be included, according to the recommendations.

Trading and investment banking activities will be outside the firewalls, and Standard & Poor’s said Sept. 14 those elements of U.K. banks face credit-ratings cuts as they won’t be able to count on government support.

Northern Rock

Osborne is also looking for other ways to reduce support for the banking sector. Billionaire Richard Branson agreed to buy Northern Rock Plc from the government last month for 747 million pounds, marking the first sale of a bank bailed out by the government since the financial crisis.

The sale of Northern Rock at a loss to taxpayers, who spent 1.4 billion pounds to recapitalize the bank in 2008, raised questions about whether Osborne would be prepared to dispose of larger stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc under similar conditions.

The government injected 65.8 billion pounds of capital into RBS and Lloyds during the financial crisis, giving it stakes of 83 percent and 41 percent respectively. The shares have since declined, leaving a paper loss for the U.K. of more than 39 billion pounds on the two holdings.

HSBC Holdings Plc, Britain’s biggest bank, has described the estimated $2.5 billion joint cost of the Vickers proposals and of the levy on bank balance sheets that Osborne introduced last year as “too high.”

If the commission’s proposals are implemented as they stand, HSBC may need to sell about $55 billion of loss-absorbing debt which “we do not need” at an annual cost of about $2.1 billion, Finance Director Iain Mackay said on a call with journalists on Nov. 9. Added to that, the lender estimates that the bank levy will cost about $400 million a year for its overseas operations.

RBS Chief Executive Officer Stephen Hester said in October the proposed firebreaks will disadvantage U.K. banks if they are “not replicated anywhere in the world.”