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Banking White Paper to give savers more protection Osborne hails bank reform giving savers more protection
(about 7 hours later)
  
Savers will have greater protection if a bank fails, under government plans. Chancellor George Osborne has said that "taxpayers will be better protected when things go wrong" thanks to banking reforms outlined by the government.
Financial Secretary Mark Hoban unveiled the banking reform White Paper, which follows the recommendations made by the Independent Commission on Banking. Earlier, Financial Secretary Mark Hoban unveiled the banking reform White Paper, following recommendations by the Independent Commission on Banking.
He confirmed retail banking operations would be ring-fenced from riskier operations such as investment banking. He said retail banks would be ring-fenced from riskier investment banking.
But Sir John Vickers, chair of the ICB, said the government should have gone further, namely setting a higher capital ratio for banks to put aside. But Sir John Vickers, chair of the ICB, said the coalition should have done more, forcing banks to hold more cash.
The ICB, which was set up to look at ways to make the UK banking system safer, wanted to see a ratio of 4.06% of pure equity capital to gross loans and investments. This would mean a bank would have to suffer a 4% fall in the value of all its loans and investments to be wiped out.
But the government is sticking to the 3% ratio agreed internationally in the Basel III rules.
"The White Paper proposals are far-reaching, but on some points - such as limits on the leverage of big banks - we believe they should go further," Sir John said."The White Paper proposals are far-reaching, but on some points - such as limits on the leverage of big banks - we believe they should go further," Sir John said.
"We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness.""We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness."
'Wider range' 'Wider range'
Mr Hoban told the House of Commons: "The government will ring-fence retail deposits from the risks posed by international wholesale and investment banking. A ring-fenced bank will be economically and legally separate from the rest of the group and run by an independent board." In his annual Mansion House speech, Mr Osborne acknowledged that risk taking in the City of London had "spilled onto our High Streets, putting taxpayers' money at risk".
"I believe that we have found a workable way to solve what I called the 'British dilemma' - protecting British taxpayers in a way that does not make the UK uncompetitive as a home of global banks."
Mr Osborne also defended the government's spending cuts, which have come in for increasing criticism given the UK's return to recession. He said growth had been hit by the eurozone debt crisis and high commodity prices.
Earlier on Monday, Mr Hoban told the House of Commons that the government would "ring-fence retail deposits from the risks posed by international wholesale and investment banking.
"A ring-fenced bank will be economically and legally separate from the rest of the group and run by an independent board."
However, the government is making an important concession to banks, who were angered at the ring-fencing proposals.However, the government is making an important concession to banks, who were angered at the ring-fencing proposals.
It is looking at broadening the range of activities allowed within ring-fenced operations to include certain hedging tools, for instance to protect against interest rate and currency fluctuations, where these are sold alongside loans to small business clients.It is looking at broadening the range of activities allowed within ring-fenced operations to include certain hedging tools, for instance to protect against interest rate and currency fluctuations, where these are sold alongside loans to small business clients.
Banks have been accused of mis-selling exactly such products to small businesses in the past.Banks have been accused of mis-selling exactly such products to small businesses in the past.
"We felt that it was in the interests of business to ensure there was a wider range of instruments included in the ring-fence, including derivatives," Mr Hoban said."We felt that it was in the interests of business to ensure there was a wider range of instruments included in the ring-fence, including derivatives," Mr Hoban said.
"These products are widely used. There is a need for them.""These products are widely used. There is a need for them."
The British Bankers' Association had warned that the original reform proposals could hurt the banking sector, and have a knock-on effect on the overall economy.The British Bankers' Association had warned that the original reform proposals could hurt the banking sector, and have a knock-on effect on the overall economy.
Labour's Ed Balls said there were still questions to answer, and accused the government of watering down the ICB's proposals.Labour's Ed Balls said there were still questions to answer, and accused the government of watering down the ICB's proposals.
"Why is the chancellor not making the statement? Or should I say the 'part-time' chancellor? What is the chancellor running scared of?" Mr Balls said."Why is the chancellor not making the statement? Or should I say the 'part-time' chancellor? What is the chancellor running scared of?" Mr Balls said.
"Isn't the truth that having failed to deliver international agreement on tougher international banking standards, the chancellor is now being forced to water down and fudge the Vickers' reforms?""Isn't the truth that having failed to deliver international agreement on tougher international banking standards, the chancellor is now being forced to water down and fudge the Vickers' reforms?"
The chancellor is expected to discuss the proposed reforms in his annual Mansion House speech on Thursday evening.
In his speech, he will say: "We've got to stop problems here in the City of London spilling onto our High Streets and putting taxpayers' money at risk.
"I believe that we have found a workable way to solve what I called the 'British dilemma' - so we are proposing to protect taxpayers in a way that does not make the UK uncompetitive as a home of global banks."
Higher costsHigher costs
Steve Davies, lead partner of retail banking at the business services firm PricewaterhouseCoopers, told the BBC that the reforms would not prevent another banking crisis.Steve Davies, lead partner of retail banking at the business services firm PricewaterhouseCoopers, told the BBC that the reforms would not prevent another banking crisis.
"It won't make our banks crisis-proof. What this does is to enable a failed bank to be properly recovered in the event of a crisis."It won't make our banks crisis-proof. What this does is to enable a failed bank to be properly recovered in the event of a crisis.
"It does not prevent a credit crunch and it does not stop a run on the bank.""It does not prevent a credit crunch and it does not stop a run on the bank."
He added that the reforms were likely to push up the cost of banking: "The cost of implementing the regulation is going to be substantial and the regulations are likely to force the banks to hold more capital back and those costs will have to be passed on."He added that the reforms were likely to push up the cost of banking: "The cost of implementing the regulation is going to be substantial and the regulations are likely to force the banks to hold more capital back and those costs will have to be passed on."
The banking reform plans will remain open for consultation until draft legislation is set out in the autumn.The banking reform plans will remain open for consultation until draft legislation is set out in the autumn.
Plans for the final legislation are expected to be in place by 2015.Plans for the final legislation are expected to be in place by 2015.