Osborne to endorse ring-fencing of high street banks
GEORGE Osborne will tonight endorse plans for British banks to ring-fence their retail operations from their investment banking arms.
The chancellor will use his annual Mansion House speech to the City to back the so-called “subsidiarisation” plan, which was contained in the Independent Commission on Banking’s (ICB) interim report.
Under the model, the Treasury will force banks to hive off their high street lending operation into a separately-capitalised subsidiary with its own staff and IT system. The retail subsidiary will have to have a core tier 1 capital ratio of 10 per cent to ensure it withstands financial shocks.
In the event of another financial crisis, the theory is the government would be able to bail out the retail bank and its depositors while letting the investment banking arm fail.
The chancellor has previously welcomed the findings of the ICB, which is chaired by Sir John Vickers, but this is the first time he will formally endorse one of its recommendations.
Although Osborne will back subsidiarisation in theory, it is still unclear exactly what form it will take. A source close to the chancellor said “the thickness and height of walls between the two subsidiaries still needs to be designed”.
A Treasury source said: “This is a far reaching shake up to make high street banks safer and protect taxpayers”
Osborne is also expected to emphasise the importance of competition in high street banking, although it is unclear whether he will back Vickers’ call for Lloyds to sell “substantially” more than the 632 branches it is being forced to divest under EU law.
The ICB will release its final report on 12 September.