UK report: banks should split retail, investment

By the Associated Press | September 12, 2011 | 3:20 AM EDT

LONDON (AP) — Major British banks should ringfence investment banking operations from mainstream activities by 2019 to reduce the risks of taxpayers having to bear the cost of any future bailouts, a government-appointed commission recommended on Monday.

The long-awaited reported from the Independent Commission on Banking said its proposals would cost the banks up to 7 billion pounds ($11 billion) a year.

The report, which broadly echoed the proposals in an interim assessment in April, also endorsed the sale of 632 branches by Lloyds Banking Group, but did not, as some expected, call for the divestiture of even more branches.

Treasury chief George Osborne planned a statement in parliament Monday afternoon to respond to the report.

The recommendations are intended to avoid a repetition of the credit crisis in 2008 when the British government bought up large chunks of the country's banking system after it ran into major financial difficulties. The British taxpayer now owns mortgage lenders Northern Rock and Bradford & Bingley, 83 percent of Royal Bank of Scotland and 41 percent of Lloyd's Banking Group.

"The risks inevitably associated with banking have to sit somewhere, and it should not be with taxpayers," said the commission, chaired by Sir John Vickers, a former chief economist of the Bank of England.

Vickers added in future, banks need much more equity capital, and that their debt "must be capable of absorbing losses on failure, while ordinary depositors are protected."

The British Bankers' Association, the industry's main lobby group, said the planned reforms "need to be carefully analyzed and compared with those agreed internationally."

In particular, it said an assessment of the reforms on the economy, the recovery and banks' ability to support their customers needs to be made.

The report recommended that U.K.-based "systemically important banks" should be required to have a loss-absorbing cushion of at least 17 percent of risk-weighted assets in their retail operations — the ordinary banking functions of current accounts and lending. Lower capital requirements would be set for smaller banks.

The Basel III agreement calls for banks to hold equity capital equal to at least 7 percent of risk-weighted assets.

The commission ruled out a total separation of retail banking from wholesale and investment banking, in part because of the greater expense, and the potential difficulties of enforcing the changes under European law.

Though the report conceded that the complete separation "would remove a channel of contagion risk from investment banking to retail banking (and vice versa)," it said it "would preclude support for troubled retail banks from elsewhere in banking groups."