Coalition Government: British banks face break-up in just one

Coalition Government: British banks face break-up in just one year

Britain's giant lenders are facing the threat of extinction after the new coalition Government pledged to establish an independent commission to decide whether to break up the banks.

 

Britain's giant lenders are facing the threat of extinction after the new coalition Government pledged to establish an independent commission to decide whether to break up the banks.

The commission was the centrepiece of the Conservative and Liberal Democrat agreement on banking reform, which included a pledge to introduce an extra tax on the industry and "robust action to tackle unacceptable bonuses". It has been given "an initial time frame of one year to report" on whether separating retail and investment banking will "reduce systemic risk".
Both parties have argued for a break-up, but the Tories want to limit the split to the "casino" activities of proprietary trading while the Lib Dems wish to go further and "separate low-risk deposit taking banking from high-risk investment banking".

 

 

The structure of the commission has yet to be decided but its terms of reference and the appointments will be overseen by a cabinet committee chaired by the Chancellor, George Osborne, that will include Vince Cable, the Business Secretary.
The committee will also decide whether to press ahead with the Conservative manifesto pledge for a competition inquiry into the industry.
Analysts warned that uncertainty caused by the inquiries would delay any recovery of the taxpayer's £65.5bn investment in Royal Bank of Scotland and Lloyds Banking Group. "It would be difficult to press ahead with material [share] sales until we have a clearer idea of the future structure of the UK banking market," Jon Peace, Nomura banks analyst, said.
The radical proposals came as it emerged that the Tories had sacrificed one of their flagship reform ideas to forge the agreement. The Financial Services Authority was to be subsumed by the Bank of England but will now survive.
To ensure there is never again the regulatory "underlap" that left huge holes in banking supervision, a new financial stability committee comprised of FSA and Bank representatives will be created.
However, the Bank will become chief regulator with "control of macro-prudential regulation and oversight of micro-prudential regulation".
Much of the detail has yet to be decided. It is unclear whether the new bank taxwill be the Lib Dem proposal of 10pc of profits, to raise £2bn annually, or the Tories' levy on liabilities, to raise £1bn.
Although the Lib Dems wanted the tax this year, sources said it is unlikely to come into effect until 2011.
Lib Dem demands for banks to be barred from paying cash bonuses of more than £2,500 are likely to be shelved but more disclosure is expected. RBS and Lloyds also face more stretching lending targets to support small businesses than those currently in place.
Angela Knight, chief executive of the British Bankers' Association, said the industry would "play our full part in making the changes agreed" but stressed the City must be protected as it is "a big international centre that brings a lot of jobs to the UK, is a big part of GDP and is a big tax payer as well".