15 Jun 2011

Chancellor backs retail bank ‘ring-fence’

Chancellor George Osborne backs plans to ring-fence banks’ retail arms and says he will sell Northern Rock. Gary Gibbon says he is trying to signal the beginning of the end of the financial crisis.

George Osborne used his Mansion House speech to endorse the proposals made by the Independent Commission on Banking (ICB) in April to protect high street banks from exposure to risks from their “casino” investment operations.

The report criticised the “excessive and ill-understood risks” taken by lenders and borrowers in the run-up to the credit crunch, adding that the safety net of taxpayer support encouraged risk-taking. It recommends that in future creditors rather than taxpayers ought to be liable for losses.

The Chancellor also signalled that the process of selling off the Government’s massive stake in banks was starting – with a buyer being sought for Northern Rock by the end of the year. The former mutual was nationalised in February 2008, in the early stages of the financial crisis.

History teaches us that risk can never be reduced to zero. We cannot hope to abolish boom and bust. Chancellor George Osborne

“Taxpayers today own a large part of the banking system, and underwrite guarantees to parts of the rest,” he told the prestigious event in London. “It’s time we started to plan our exit.”

Mr Osborne said UK plc had faced a series of “headwinds” domestically and internationally over the past year. But he insisted the economy was “on the mend”.

Retail ring-fence

Barclays already has plans to ring-fence its retail banking arm and has begun the process of reviewing employee contracts and thousands of bank branch leases. Lloyds Banking Group, which has a relatively small investment banking arm, is likely to be largely unaffected by any move to ring-fence its retail business.

Blog: Osborne's Northern Rock sale is just the beginning

HSBC already operates a variant of the subsidiary model.

The precise design of the firewalls between the retail and investment branches of banks will not be known until the commission publishes its final report on 12 September.

The Chancellor also set out a new agreement for financial services that would allow the City to maintain its position as a global leader “without putting at risk the entire economy”.

He confirmed plans to publish the Government’s White Paper on financial regulation on Thursday, and took a swipe at his predecessor, Gordon Brown, referring to the establishment of more checks and balances in the system and saying that banks would be allowed to “fail safely” under the new system.

He added: “History teaches us that risk can never be reduced to zero. We cannot hope to abolish boom and bust.”