The U.K. government Monday threw its weight behind sweeping new reforms for the banking sector that will involve requiring banks to segregate, or "ring-fence," their retail activities from riskier investment banking activities to better protect depositors.
In a widely expected endorsement of the Independent Commission on Banking report, Chancellor of the Exchequer George Osborne told lawmakers that it would take action immediately to bring in ring-fencing ahead of the final legislative package for capital requirements.
Meanwhile, the government, as an 83%-holder in Royal Bank of Scotland PLC, said the bank would be completely restructured as a retail bank for its corporate and individual clients. While the investment bank would support this business, it would no longer be the bank's focus.
Mr. Osborne said that the U.K. taxpayer had paid some £45.5 billion into RBS in the wake of the financial crisis. At the current price, that investment has fallen in value by £27 billion, he added.
Still, the focus of his statement was the controversial ring-fencing of U.K. banks.
"I can confirm to the House today that primary and secondary legislation related to the ring fence will be completed by the end of this Parliament in May 2015 and banks will be expected to comply as soon as practically possible thereafter," Mr. Osborne told lawmakers.
The ring-fenced bank will be legally and operationally independent and comprise the deposits and overdrafts of individuals and small and midsize businesses.
"Our objective is clear. We want to separate high street banking from investment banking to protect the British economy, protect British taxpayers and make sure the nothing is too big to fail. Second, we will make sure that banks have bigger cushions, so they are better able to withstand losses," Mr. Osborne said.
However, the government pulled back from the ICB's recommendations that the country's largest banks should hold as much as 20% in equity and loss-absorbing debt against their assets.
Large ring-fenced retail banks will be required to hold equity capital of at least 10%. There will also be a minimum requirement for the loss absorbing capacity of the big banks of at least 17%, Mr. Osborne said.
This will apply to the U.K. operations of British banks. It will also be applied to the non-U.K. operations of U.K.-headquartered banks, except where they can demonstrate they do not pose a threat to the UK taxpayer, he added.
Still John Longworth, director general of the British Chambers of Commerce, said that the "unilaterally high capital ratios proposed by the report could weaken growth over the medium-term. We should not damage an industry with good growth prospects where the U.K. has a comparative advantage."
Meanwhile, implementation for the outstanding proposals would proceed in stages with the final changes related to loss absorbency fully completed by the beginning of 2019, in line with the Basel agreement.
Mr. Osborne said that these measures were designed to protect British taxpayers from the cost of failing banks, while at the same time acknowledging the importance of the financial sector to our country.
"Britain should remain home to one of the world's leading financial centers and the home of global banks. But the strength of this industry is also a potential weakness to the economy if not properly regulated," he said.
Mr. Osborne said that the government estimates that total costs to U.K. banks to be between £3.5 billion and £8 billion, compared with the ICB's estimate of between £4 billion to £7 billion.
Earlier Monday, several of the banks and the British Bankers Association indicated that they didn't expect to issue statements on Monday's response by the government because the ICB's proposals had already been flagged up from as early as June before its final report September, which Mr. Osborne had already welcomed as making banks safer, and "protect their vital services to the economy if things go wrong."
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