BOURNEMOUTH, England: British banks that fail to shield their day-to-day banking from risky investment activities will face being broken up, Finance Minister George Osborne said Monday. Britain is shaking up its system of bank regulation following the 2008 financial crisis, when the government poured 65 billion pounds ($102 billion) of taxpayers’ money into rescues of Royal Bank of Scotland and Lloyds.
The sector has also come under fire for rigging the Libor global interest rate, mis-selling insurance, breaking money laundering laws and paying bonuses widely seen as excessive.
Banks were already expected to have to “ring-fence” operations such as standard bank accounts and payments from their riskier investment banking activities, which will hit major players such as Barclays, HSBC, and RBS.
But Osborne said he was prepared to go further. “If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring-fence. In the jargon, we will ‘electrify the ring-fence,’” he said in a speech.
The breakup of banks which fail to keep to the rules was demanded by members of parliament who reviewed government plans late last year.
Under the new rules, the Bank of England will monitor whether banks ensure that risks taken by their investment banking arms do not endanger their retail divisions.
If the central bank finds a breach, the government will make the politically sensitive decision on whether to employ the “nuclear option” of forcing banks to sell one of the two arms.
Osborne said the government could punish directors of failed banks by banning them from the industry. “I want to see how we can strengthen the sanctions regime for senior bankers – for example, should there be a presumption that the directors of failed banks do not work in the sector again?” he said.
RBS is expected to be fined for attempted manipulation of Libor this week. Osborne repeated his call for fines to be paid out of money earmarked for bankers’ bonuses, saying it would cause “enormous public anger” if the taxpayer footed the bill.
“The thing that could have potentially been the cause of real public anger this spring [would have been] money from the taxpayer going to pay the RBS Libor fines in America,” he said.
Asked whether there should be resignations at RBS as a result of the bank’s imminent fine for rate rigging, Osborne said that it was “quite well known that RBS are thinking about changes” amongst the investment bank’s senior management.
“It is right that those who are responsible – not just those who are directly responsible, but also those who were dong the supervising, must also bear a level of responsibility,” Osborne said.
RBS is expected to part company with the head of its investment bank, John Hourican, when the settlement is announced later this week.
Banks have come to accept the idea of a ring-fence, having initially resisted it. A source close to one of Britain’s biggest lenders said the industry’s main concern had been to have clarity over what future regulation will involve.
The source said that, with lenders already under intense scrutiny, Osborne’s decision was a longer term move designed to prevent banks letting standards drop when attention is less focused on the industry.
Antonio Horta-Osorio, chief executive of Britain’s biggest retail bank, Lloyds, had earlier welcomed the ring-fencing proposals, saying it would lessen the chances of taxpayers’ money having to be used again to bail out U.K. banks.
Legislation will go to parliament later Monday, and Osborne said he expected it to be passed within a year.
The British Bankers Association, a lobby group, said the plans were “regrettable.” The group said, “This will create uncertainty for investors, making it more difficult for banks to raise capital which will ultimately mean that banks will have less money to lend to businesses.”
Osborne, who delivered his speech at American investment bank J.P. Morgan’s offices in Bournemouth, southern England, insists that his reforms strike the right balance between responding to public anger and avoiding a populist over-reaction.
“Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system. The anger people feel is very real. Let’s turn that anger from a force of destruction into a force for change,” he said.
Britain’s shadow finance minister, Ed Balls, said the government had not gone far enough.
“For all the rhetoric and the partial climb-down he has been forced into, George Osborne is still failing to deliver the radical banking reform we need,” he said.
Shares in U.K. banks were lower following the speech. RBS led the fallers, down 1.6 percent, with Lloyds and Barclays trading 1 percent lower and HSBC down 0.9 percent.
However, Tony Anderson, a partner in the banking team at international law firm Pinsent Masons, said the move could backfire on the government – making it more difficult to sell of its shareholdings in RBS and Lloyds.
“There could be significant political fallout for the Government from any proximity between a sell-down of shares in a state-owned bank and a full separation of banking operations following a breach of the ring-fencing measures,” Anderson said.