Chancellor George Osborne Backs Plans for "Firewalls" around Retail Arms of High Street Banks

Strategic Insights -

Chancellor George Osborne has endorsed proposals to create internal divisions at High Street banks, separating their retail arms from their investment operations to prevent a fresh financial crisis. This move is part of a "new settlement" for financial services aimed at maintaining the City's position as a global leader while ensuring the stability of the national economy. The Chancellor also announced plans to sell off the government's stake in Northern Rock by the end of the year, marking an important step towards reducing the state's involvement in the banking sector.

Key Takeaways:

  • The Independent Commission on Banking has proposed two key measures: bail-in instead of bail-out, and a ring-fence around better-capitalized high-street banks to protect them from investment operations failures.
  • The government endorses both proposals in principle, with the exact design of the firewalls to be determined by the Vickers Commission's final report on September 12.
  • A permanent Financial Policy Committee will be established within the Bank of England to monitor overall risks in the financial system and deploy new tools to deal with excessive leverage.
  • A Prudential Regulation Authority and a new Financial Conduct Authority will also be created to assess the soundness of individual firms and regulate the operation of markets and protect consumers.
  • The sale of Northern Rock is expected to raise approximately £1bn, with the government aiming to reduce its stake in the bank and "get the British taxpayer out of the business of owning banks".
  • Contenders for the sale of Northern Rock include Sir Richard Branson's Virgin Money, Coventry and Yorkshire building societies, investment groups NBNK and Olivant, and Tesco Bank.

Statistics:

  • £1bn: the expected amount to be raised from the sale of Northern Rock.
  • £1.4bn: the amount injected into Northern Rock by the government.
  • 2008: the year Northern Rock was nationalized.
  • 150 years: the time since the last run on a UK bank.
  • September 12: the date the Vickers Commission will publish its final report on the design of the firewalls between retail and investment branches of banks.
  • £1bn: the amount expected to be raised from the sale of Northern Rock.

Sources:

  • Chancellor George Osborne, "Mansion House speech" (no date provided).
  • Independent Commission on Banking (no date provided).
  • Vickers Commission (no date provided).