The rest of the European Union will be watching the U.K. closely as it implements a series of banking reforms in an attempt in mitigate what was identified as serious vulnerabilities in the system.
Last week, U.K. Chancellor of the Exchequer (treasury secretary) George Osborne told Parliament that banks will have to ring-fence cash for families and small businesses to stop money being sucked away by speculative investments.
Ring-fencing is part of the coalition government’s decision to implement key recommendations from the Independent Commission on Banking (ICB) report headed by Sir John Vickers. The purpose of the reforms is to try and avoid the banking crash of 2008 while giving banks time to adjust. Ring-fencing refers to walling off assets into a separate entity for protection, in this case, walling off cash for families and small businesses from riskier investments also held by the banks.
“This government is determined to do better at protecting British taxpayers from the cost of failing banks,” Osborne said, “while at the same time acknowledging the importance of the financial sector to our country.”
According to The Independent article about one year ago, state support for the banking industry in the crisis had already reached $1.3 trillion.
To help banks adjust to the structural changes, the laws enforcing this ring-fencing will not be passed until 2015 and banks can implement the necessary procedures in stages finishing in 2019.
“We’re going further than any other major country in the European Union—or the United States—to make our banking system safe by separating the retail and personal lending from the casino banking,” said Business Secretary Vince Cable, in a statement on Dec. 23 by coalition partner, Liberal Democrats, confirming their endorsement of the plan.
Cable also said that Britain is “much more exposed to a banking crisis than any other major country—the balance sheet of the banks is about 500 percent of British GDP. That’s extraordinarily large, that’s where we’ve got to act.”
However, this long honeymoon has not eased anxiety in financial circles that say separating retail and investment banking will hamper the U.K.’s ability to return to financial health.
“Businesses still find it difficult to get access to capital, or capital on reasonable terms, in what is a highly risk averse environment,” John Longworth, director general of the British Chamber of Commerce told Reuters. “This creates the danger of slowing the recovery and it is possible that Vickers’s recommendations could add to this problem.”
The move, however, was welcomed by the Federation of Small Businesses. “We applaud the chancellor for not watering down the ICB’s proposals and committing to implementing them in full before the end of this Parliament,” said federation chair John Walker.
“For too long, the banking sector has been dominated by a few big players and the recommendations should help to bring stability to the banking sector and open up competition, which in turn will help give small businesses more choice and a better deal.”
Osborne said the government had three clear objectives. The first is to separate regular consumer banking services from wholesale and investment banking activities.
The second is to ensure banks are set up to absorb greater losses without having to be bailed out by the government and taxpayers.
The last is to create more competition in the banking sector, by “increasing the number of banks on the high street and the power of customers to switch accounts.”
