The author of the blueprint for banking sector reforms has criticised the government's decision to water down some of the main proposals contained in the report by the Independent Commission on Banking.
Less than an hour after the government published a white paper intended to overhaul the banking sector, Sir John Vickers, who chaired the ICB, said the government should have gone further in adopting his committee's proposals to make the banking system safer by ringfencing Britain's high street banks from their riskier investment banking arms.
He stressed that the tensions in the eurozone meant the government should press ahead with the proposals, and urged the coalition to resist any further pressure to backtrack on the reforms, which must be implemented by 2019.
As much as a third of bank assets, or about £2.3tn, will be inside the ringfenced banks in an effort to avoid another taxpayer bailout of the system.
"International events keep underlining the need for fundamental reform to make banks safer and to shield taxpayers from future risk of loss," Vickers said.
He highlighted the government's decision to backtrack on the ICB's proposal to limit the risks big banks run, measured through what is known as a leverage ratio: "The white paper proposals are far-reaching, but on some points – such as limits on the leverage of big banks – we believe they should go further. We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness."
Vince Cable, the business secretary, who campaigned hard for banking reform, said the reforms were "pioneering" and the crucial aim of a "proper separation of the casinos from the ordinary banking businesses" would be achieved.
Vickers's intervention came after a rowdy session in the Commons during which Treasury minister Mark Hoban heralded the white paper as the government's move to ensure "British banks will be resilient, stable and competitive, and so attractive to investors at home and abroad".
The government believed the proposals would cost the economy in the region of £600m to £1.4bn a year for 30 years but that this would be outweighed by the benefits. "Compare that to the estimate that the 2007-2009 crisis has already cost the UK economy £140bn, one hundred times the maximum cost estimate," he said.
They will also knock between £6bn and £9bn off the taxpayer stakes in Royal Bank of Scotland and Lloyds Banking Group, although it is argued that this impact is largely priced in. RBS shares rose 3%, while Barclays was 2% higher after the white paper was published.
The shadow chancellor, Ed Balls criticised the government's approach. "Why is the chancellor not making a statement?" he asked.
International regulations are setting a leverage ratio of 3%, but the ICB had called for the biggest banks to have a ratio of 4% in an attempt to limit the risks they take. This has been rejected by the government after lobbying by building societies.
But banks will also need to hold 17% of their assets in loss-absorbing capital – a mixture of equity and debt – although in a major concession to big banks such as HSBC and Standard Chartered this will not apply to international operations. Cable said: "There is no overwhelming reasons why they should operate out of London. When you have good, well run players there is no point putting them at a disadvantage."
In other signs of lobbying by the industry, operations inside the ringfence will be allowed to sell some derivatives products – already the subject of controversy – to small business customers. And in an indication of the complexity of what lies ahead for the banks – which face a bill of up to £7bn to implement the reforms – banks will have until 2025 to split up their pension funds between their ringfenced and non-ringfenced activities.
In a foreword to the white paper, Cable and George Osborne write: "A zero-failure financial system is not our aim, nor should it be."
Former investment banker Ken Costa said: "Capital requirements, loan ratios, buffers, and ringfencing are important but not sufficient to restore confidence in our banking system. We also need a fresh approach from the banks themselves."
guardian.co.uk © Guardian News and Media Limited 2010
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