George Osborne will formally unveil the government’s banking reforms in a speech at Mansion House later this evening. The reforms are in line with the recommendations of Sir John Vickers’s Independent Banking Commission (ICB), as laid out by the Treasury, which published this White Paper earlier today.
For those who’ve forgotten, Vickers suggested splitting retail and investment banking through a Glass-Steagall-type ‘ring-fence’ mechanism that would protect retail, SME deposits and overdrafts while commanding that the ring-fenced part of the bank is not dependent on other departments for liquidity. This, it is hoped, will ensure that the taxpayer is insulated from bailouts in the future, which is, obviously, a key political demand across the spectrum of voters.
The ICB also advised that capital requirements be raised to limit risk. For some time now, the government has been pushing the EU to go further than the Basel III protocals. It intends that British banks should have an equity-to-capital ratio of 10 per cent, in line with the ICB’s report.
The Treasury says that this requirement will improve the competitiveness of British financial services. Critics say that raising the ratio above the standard set by Basel III is, by definition, uncompetitive. While others warn that greater capital requirements will further stifle lending, which will impede economic recovery, which will have electoral consequences.