Andy Rain, via European Pressphoto AgencyBanks at Canary Wharf in London.
6:47 p.m. | Updated
LONDON — As banks across Europe came under renewed pressure, Britain’s government proposed a radical industry makeover on Monday that could cost the financial firms as much as £7 billion ($11 billion).
On Monday, the government-appointed Independent Commission on Banking called for banks to separate their deposit-taking operations from investment banking services, stopping short of completely breaking up the firms. The panel plans to give banks until 2019 to adapt to new rules intended to make the financial sector more stable, saying an “extended implementation period would be appropriate.”
George Osborne, the chancellor of the Exchequer, said the commission, led by a former Bank of England chief economist, John Vickers, “has done an excellent job.”
“John Vickers himself has set out a timetable and I intend to stick to that timetable,” Mr. Osborne said.
Leon Neal/Agence France-Presse — Getty ImagesJohn Vickers, a former Bank of England chief economist, headed a 14-month review of British banks.
Jon Pain, a partner at KPMG, called the proposals “game changing” and said they were “a return to a more simple 1940s and ’50s style of retail banking where it is perceived as more of a basic utility.”
The proposals, which go beyond banking reforms in the United States and elsewhere, are expected to lead to extensive lobbying from the banks before any final decisions on new rules are made by the British government.
Under the proposal, British banks would have to separate their businesses taking deposits and lending to consumers and businesses from groups involved in stocks, derivatives and equity and debt underwriting. The two subsidiaries would be separately capitalized, have different boards, different cultures and report results as if they were two different companies, the commission report said. Capital from the investment banking unit could be injected into the retail bank if needed, and the two businesses could share customers and expertise, the commission said.
Some banking executives have argued that the changes would hurt investors, the economy and industry competitions.
Banks with large investment banking operations, including Barclays and Royal Bank of Scotland, may be most affected by the new rules, some analysts have said. The separation could drive up their funding costs if investors and lenders perceived them as riskier. Spokesmen for the two banks declined to comment.
British banking stocks fell on Monday, with Barclays down 1.6 percent and Royal Bank of Scotland more than 3 percent, as markets were unnerved by the nagging prospect of a Greek default.
But the commission has argued that the benefits — particularly a healthier banking industry with less probability of government bailouts — would outweigh the short-term costs.
“Retail subsidiaries would be legally, economically and operationally separate from the rest of the banking groups to which they belonged,” the commission said in its 360-page report. “The improved stability that structural reform would bring to the U.K. economy would be positive for investment both in financial services and the wider economy.”
The 2019 deadline is about four years later than some analysts had expected; the new rules would be adopted after the next general election.
Prime Minister David Cameron has grown increasingly nervous that making major changes now could harm an already weak economic recovery, two government officials said last week. They declined to be identified because no final decision had been made.
Mr. Vickers warned the government that scrapping parts of the proposals or changing them in favor of the banks would be “a great mistake.”
“The too-big-to-fail problem must not be recast as a too-delicate-to-reform problem,” Mr. Vickers said.
“More stress for banks” this year because of Europe’s sovereign debt crisis “underlines that the status quo is not an option,” he said. “Things will need to change.”
Ed Balls, the opposition Labor Party’s candidate for the treasury position, said the commission put forward “a tough and radical proposal” and that “the stalled recovery is not an excuse for ducking reform.”
Article source: http://dealbook.nytimes.com/2011/09/12/britains-i-c-b-recomends-gradual-banking-reform/?partner=rss&emc=rss
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