Chancellor of the Exchequer George Osborne will allow the retail units of banks operating in the U.K. to hedge currencies and some simple derivatives on behalf of small and mid-sized companies, softening the recommendations of the Independent Commission on Banking.
In the government’s first detailed response to the recommendations made by former Bank of England Chief Economist John Vickers, Osborne will say retail banking units protected by a firewall will be able to hedge currencies and plain interest-rate derivatives so that business banking doesn’t suffer. More complex derivatives trades won’t be allowed. Vickers last year proposed all those functions remain outside the retail operations of a bank.
Osborne’s plan adopts the overwhelming majority of the Vickers report, which recommended that banks create separate boards for retail and investment banking operations with at least two thirds of their members sitting on only one board. Banks will also be forced to have separate risk committees.
“We’ve got to stop problems here in the City of London spilling onto our high streets and putting taxpayers’ money at risk,” Osborne will say in his annual Mansion House speech to financiers in London tonight, according to remarks released by his office. The White Paper outlining the government’s plans will be published in Parliament today and draft legislation will be in place in the third quarter.
In the same speech, Osborne may also announce measures with the Bank of England to improve the flow of credit in the economy, the Financial Times reported late yesterday. The central bank has softened its opposition to such action, the newspaper said, citing four unidentified officials. A spokesman from the Treasury and a spokeswoman from the bank declined to comment.
‘High and Flexible’
The Treasury plans to pass all legislation relating to Vickers recommendations by 2015 and fully implement them by 2019, resisting pressure from the industry to slow down their adoption. Banks will have to build so called “high and flexible” firewalls 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. Retail banks will be prevented from holding equity of the other units.
The proposed legislation will also include plans to increase competition and put bank customers first among creditors in the event of a failure, the so-called “depositor preference” advocated by Vickers.
Osborne will exempt smaller banks from the rules so that only institutions big enough to threaten the viability of the financial sector have to implement them. Banks such as HSBC Holdings Plc with operations outside the U.K. that aren’t a risk to financial system will be excluded from having to hold larger loss-absorbing buffers.
Osborne’s plans will also adopt international standards on leverage ratios to prevent U.K. institutions from being put at a competitive disadvantage.
Vickers proposed that the units inside the firewalls will handle all checking accounts, mortgages, credit cards and lending to small and medium-size companies. As much as a third of U.K. bank assets, or about 2.3 trillion pounds ($3.6 trillion), and 90 percent of deposits will be included, according to the recommendations. Trading and investment-banking activities will be outside the firewalls.