Banks that fail to shield their day-to-day banking from risky investment activities could be broken up, chancellor of the exchequer George Osborne said yesterday, bowing to political pressure to come down harder on reckless lenders.
With part-nationalised Royal Bank of Scotland set to be fined up to £500 million this week for interest rate rigging, Mr Osborne decided to “electrify” the ring-fence around banks’ core retail activities with the threat of break-up.
“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,” Mr Osborne said in a speech ahead of the publication of the banking reform legislation.
The UK has spent more than €100 billion propping up its over-leveraged banking system, much of it poured into RBS. London’s structural reforms go further than France and Germany, which, like the United States, are only demanding that banks separate out their proprietary trading, where they invest the banks’ own funds, from the rest of their businesses.
Five-year sentence
Germany is, however, considering a new law that would see executives jailed for up to five years if found guilty of reckless behaviour that jeopardises their bank, a move described by a senior government source in Berlin as a signal to Europe, which is seen as not moving fast enough.
Mr Osborne said Britain could ban directors of failed banks from working in the industry. “We should not create unnecessary obstacles to pan-European rules with a zig-zag approach. A crisis does not stop at the national border. We need a co-ordinated approach in this area,” said Michael Kemmer, managing director of the German Banking Association.
Under the new rules, the Bank of England will monitor whether banks’ investment banking arms, which trade complex securities, are endangering their retail operations. If the central bank finds a breach, the government will decide whether to flick the switch on the electric fence, forcing the bank to sell one of the two arms.
Britain’s finance ministry confirmed it would stick to rules on limits to a bank’s leverage that have been set at the global level. Leverage will be capped at 33 times a bank’s capital, weaker than an original proposal for a maximum of 25 times.
‘Fair and transparent ’
The UK government will also present detailed proposals to open up the bank payments system and reduce the “big four” dominance of high-street banking.Mr Osborne said: “We will make sure that new players in the market can access these systems in a fair and transparent way.” – (Reuters)
