U.K. Chancellor of the Exchequer George Osborne said for the first time regulators will get the power to break up banks, hardening legislation aimed at making lenders safer. He will also open up industry payment systems.
Osborne said in a speech today the breakup powers will be added to the Financial Services (Banking Reform) Bill to be presented to Parliament this week. Authorities will be able to split up an institution that doesn’t abide by “ring-fencing” rules to insulate retail operations from investment-banking activities. Bank payment systems will be regulated to make the system more responsive and allow new entrants into the industry.
“My message to the banks is clear: If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether -- full separation, not just a ring-fence,” Osborne said in Bournemouth, southern England, according to a text released by his office. “Banks found ways to overcome and get around the rules. Greed overcame good governance. We could see that again, so we are going to arm ourselves in advance.”
The tougher approach marks a change of stance by Osborne, who said as recently as November he didn’t want the proposals changed for fear of “unpicking a consensus” developed in the last two years. Since then, Osborne has come under pressure from lawmakers in both Prime Minister David Cameron’s coalition government and the opposition Labour Party to do more as the Libor manipulation scandal intensified. The British Bankers’ Association, the industry lobby group, said the new plan would mean banks have less money to lend.
The revised banking-bill legislation being presented this week won’t specify what would trigger an intervention. That will be identified in secondary legislation later. Osborne also said he’ll introduce detailed proposals for overhauling bank payments systems.
“Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days? The system isn’t working for customers, so we will change it,” Osborne said. “We will make sure that new players in the market can access these systems in a fair and transparent way.”
BBA Chief Executive Officer Anthony Browne said the bank breakup plan threatened London’s attractiveness as an international financial center.
“This will create uncertainty for investors, making it more difficult for banks to raise capital which will ultimately mean that banks will have less money to lend to businesses,” Browne said in an e-mailed statement. “What banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow.”
Osborne’s shift also marks a victory for the Parliamentary Commission on Banking Standards, the cross-party panel headed by Andrew Tyrie, a lawmaker from Osborne’s Conservative Party. Osborne clashed in November with members of the 10-member committee, which he himself appointed last year to look at conduct in the financial-services sector following the Libor scandal and subsequently asked to lead the pre-legislative scrutiny of the banking bill.
Tyrie said in a statement that Osborne's speech marked ``an important step in the right direction.''
Osborne said he expects the legislation being introduced today to become law within a year. The job of overseeing the new regime will fall to the Bank of England, which is set to gain new powers for supervising banks under Mark Carney. Osborne today praised the Bank of Canada governor, who is due to take over from Mervyn King at the helm of the U.K. central bank on July 1, as “the very best person in the world to do the job.”
Osborne said he wants Royal Bank of Scotland Group Plc, Britain’s biggest publicly owned lender, to pay any fines for Libor manipulation from its bonus pool.
“The sight of money coming in from the taxpayer to pay RBS Libor fines would have caused enormous public anger,” Osborne said during a question-and-answer session after his speech. “That is not on.” He said those found to be involved in abusing Libor should face the “full force of the law,” with supervisors sharing full responsibility.
RBS may pay 500 million pounds ($785 million) to U.S. and U.K. authorities to settle the Libor claims, two people familiar with the matter said on Jan. 29. Osborne wants the fines paid either from this year’s bonus pool or through clawing back bonuses from previous years.
Osborne said today that Libor and the mis-selling of interest swaps by banks confirms the need for tougher action in order to quell the anger felt by many voters following the financial crisis that began in 2007.
“I understand that anger,” he said. “I feel it too.”
Successive witnesses at the panel’s hearings expressed concern that the government proposals will be diluted by the banks before they are properly implemented.
Witnesses including former Barclays Plc CEO Martin Taylor said regulators should be given the power to fully split banks along retail and investment lines if proposed arrangements for a firewall fail.
Former Federal Reserve Chairman Paul Volcker, who designed the U.S. approach, told the panel that the successful ring-fencing of banks’ operations is very difficult to maintain and financial institutions will seek to unwind the separation over time.