UK treasury chief unveils bank restructuring plan

December 19, 2011 - 1:15 PM

LONDON (AP) — The British government says it will legislate sweeping changes in banking regulation that are aimed at protecting the economy from excessive risk but could prove costly for the country's major banks.

Treasury chief George Osborne, speaking in Parliament on Monday, confirmed that the government will press ahead with changes recommended by the Independent Commission on Banking, including the separation of retail banking from riskier investment banking.

Osborne left many details still to be decided, but promised that the government would publish legislative proposals in the first half of next year and enact them by 2015. New regulations would be effective in 2019, as the Independent Commission proposed.

"We want to separate high street (retail) banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail," Osborne said.

Britain suffered three major bank failures because of the credit crisis: mortgage lender Northern Rock and two giant banks, Lloyds Banking Group and Royal Bank of Scotland.

The legislation will require banks to make their retail activities wholly separate, concentrating on serving individuals and small- and medium-sized businesses. Services for large corporations might be placed either in the retail bank or outside.

Retail banks will be required to hold equity capital equal to at least 10 percent of risk-weighted assets, three points higher than the international standard, the Basel III agreement, Osborne said.

British-based banks will also have to have primary loss absorbing capacity — which could also include unsecured debt — of at least 17 percent, though their non-U.K. operations could be exempt if a bank can demonstrate that they pose no threat to the British economy.

Complying with the tougher new rules will cost banks between 3.5 billion pounds ($5.4 billion) and 8 billion pounds, the commission estimates, though some banks have suggested the cost will be much higher.

"Much of this reflects the cost to them of removing the subsidy that comes from any perceived implicit taxpayer guarantee, which is precisely what we intend," Osborne said.

"Even a relatively modest reduction in the likelihood or impact of future financial crises would yield an incremental economic benefit of 9.5 billion pounds per year," he added.

HSBC has estimated its cost would be 2.1 billion pounds. The bank, which has major operations in Asia, has hinted that it could move its headquarters to Hong Kong if the new rules prove too onerous.

Osborne said the proposals were intended to solve what he called the nation's dilemma: "How Britain can be home to one of the world's leading financial centers without exposing British taxpayers to the massive costs of those banks failing."