Thousands of City jobs are on the line in the new year when Royal Bank of Scotland will announce further shrinkage of the investment banking arm that is blamed for the £45bn taxpayer bailout – the biggest in the world.
Setting out the government's response to the findings of the Vickers report on the banking industry, George Osborne pledged the most far reaching changes to the sector "in modern history".
But the chancellor used his statement to MPs to seize upon an existing overhaul of the investment banking arm of RBS, promising "further significant reductions" in a division which employed more than 25,000 before the 2008 bailout.
The headcount has already fallen to 18,000 and analysts such as Ian Gordon, of Evolution Securities, reckon at least another 5,000 will be axed as the bank pulls out of risky businesses and tries to boost its profitability.
Stephen Hester, chief executive of RBS, has already cut the size of the investment bank – known as global banking and markets – since taking the helm in October 2008 and signalled in November that further cuts were coming.
Analysts said that the downturn in market activity due to the eurozone crisis was hitting investment banking but that the proposals outlined by Sir John Vickers' Independent Commission on Banking (ICB) were also making it tougher to run the business as it would need to hold more capital.
Osborne, who also pledged to follow Vickers' recommendation to separate high street banking from investment banking, said: "We believe RBS's future is as a major UK bank, with the majority of its business in the UK and in personal, SME (small and medium sized enterprises) and corporate banking. Investment banking will continue to support RBS's corporate lending business but RBS will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding."
Analysts reckon that RBS, which has called in consultants McKinsey, could end up shutting its equity business – Hoare Govett – and closing down its risky structured products to focus on currencies, money markets and trade finance. Hester has said previously that the thinks there will be few buyers for the investment bank.
The taxpayer is sitting on a £27bn loss in its 83% shareholding in RBS. Osborne said that "British people are angry about what happened in our banks, and angry at the politicians who let it happen" as he launched another attack on the shadow chancellor, Ed Balls, whom he said had knighted Sir Fred Goodwin, the former RBS boss.
Promising that Britain would still remain one of the world's biggest financial centres, Osborne told MPs the coalition would adopt the proposals from the ICB, under which:
• High street banking services would be separated from wholesale and investment banking activities by a "ring fence".
• Banks would hold bigger cushions to absorb losses without recourse to the taxpayer, of up to 17% in some cases, and more than international rules require.
• The number of high street banks would rise, making it easier for customers to switch accounts.
Osborne promised that legislation would be passed by 2015 and the required changes implemented by 2019 – a timescale that sparked Tony Greenham, head of finance and business at the New Economics Foundation, to warn it "gives banks years to lobby for laws to be watered down even further".
Vickers, who is warden of All Souls College, Oxford, welcomed the coalition's decision to back his proposals. "The costs and dangers of unreformed banks are plain for all to see. With the architecture for reform now settled, a more stable structure should now be built," Vickers said.
The chancellor increased the implementation costs of the proposals to between £3.5bn and £8bn – higher than the £7bn upper estimate set out by Vickers. He said the reduction in the likelihood or impact of future financial crises would cause an incremental economic benefit of £9.5bn a year. The government estimates the annual cost to GDP will be £0.8bn to £1.8bn – equivalent to 0.1% of output.
Businesses are concerned that the costs of implementing the reforms will be passed on to them. John Longworth, director general of the British Chambers of Commerce (BCC), said: "Businesses still find it difficult to get access to capital, or capital on reasonable terms, in what is a highly risk-averse environment. This creates the danger of slowing the recovery and it is possible that Vickers' recommendations could add to this problem. Given the timescales for the implementation of credit easing, the time may now have come for the government to consider the introduction of an SME Bank."
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