Osborne eyes change of strategy to boost liquidity

GEORGE Osborne is expected to use tonight’s Mansion House speech to reveal a new strategy aimed at boosting liquidity in the banking system.

The chancellor’s attempt to ease the credit logjam comes as both companies and households continue to struggle to access finance.

The move follows Bank of England deputy governor Paul Tucker’s acknowledgement on Tuesday that it needed to do more to alleviate tight credit conditions.

In the same speech, Osborne will also tell the City that he intends to press ahead with plans to ring-fence retail banking and give savers greater protection if a lender collapses.

The reforms laid out by the Vickers commission, come despite months of wrangling with the EU as well as domestic fears of a multi-billion pound cost to banks.

Only small banks will be spared the ring-fence but the overseas operations of banks which do not pose a threat to financial stability will escape being forced to hold an additional loss-absorbing buffer.

Osborne is expected to say: “We’ve got to stop problems here in the City of London spilling onto our high streets and putting taxpayers’ money at risk.

“High-street banking will be ring-fenced so that taxpayers are better protected when things go wrong. We will be able to bail in creditors when a bank fails rather than turning to the public purse.”

Osborne is persisting with controversial plans to rank the rights of individual depositors above bondholders and corporate creditors in the event of a bank failure.

The Treasury will today publish a white paper with a “high and flexible’ ring-fence between retail and investment banking. The division is set to include equity and governance restrictions and a small amount of flexibility inside the ring-fence for simple hedging tools where they are part of the normal corporate banking set-up for small business. The paper should also confirm the details of plans to make it easier for consumers to switch their bank account provider.

Under the new system the Bank of England and the Financial Services Authority will publish reviews on how prudential standards and conduct requirements can act as a barrier to market entry.