Banking system must be 'reset’, says Osborne

The Chancellor pledges today to “reset” Britain’s banking system, warning that banks will be broken up if they ignore orders to ringfence their investment and retail banking divisions.

By Graham Ruddick

6:25AM GMT 04 Feb 2013

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9846197/Banking-system-must-be-reset-says-Osborne.html

George Osborne will reveal that the Coalition intends to “electrify” the ringfence that will separate the day-to-day retail operations of a bank from its potentially riskier investment banking division.

This means that, if banks are judged by the new Prudential Regulation Authority to be trying to flout the rules, the Government will have the power to order a complete break-up of the bank.

The idea of toughening the ringfence is the brainchild of Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards.

However, the proposals have already attracted opposition from the banking industry, with the British Bankers’ Association calling the move “regrettable”.

Anthony Browne, chief executive of the BBA, said last night: “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.

“No other major economy is considering moving away from the universal model of banking because it undermines banks’ ability to provide all the services businesses need.

“This decision will damage London’s attractiveness as a global financial centre.”

Mr Osborne is expected to say that “electrifying” the ringfence will allow the Government to “arm ourselves in advance” in case banks try to flout the rules.

“We’re not going to repeat the mistakes of the past,” he will add, in a speech at JP Morgan’s offices in Bournemouth.

The legislation, which builds on the recommendations of the Independent Commission on Banking, is being sent to Parliament today and should be law within a year.

“Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system. The anger people feel is very real. Lets turn that anger from a force of destruction into a force for change,” Mr Osborne will say.

“Change that will give us a banking system that will work for us all. In 2013, thanks to the changes we are making, that goal is in sight.”

On top of the new legislation, Mr Osborne will say that he is also overhauling the regulatory system to give the Bank of England more powers, examining the culture and ethics of banking, and seeking to improve competitiveness by making it easier to switch bank accounts.

It is thought that from September, customers could be able to switch account to a rival within a week.

Speaking about the old system of regulation, he will claim: “The fire alarm was ringing, but no one was listening. And when the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out. The British people need to know that lessons have been learnt. And they have.”

Despite increasing the regulatory oversight of banks, Mr Osborne will also seek to highlight the importance of the industry to the economy – which is why, he says, the speech will be given from the offices of JP Morgan, the largest employer in Dorset.