Chancellor unveils banking reform to protect taxpayers

The UK banking system is to be overhauled in order to 'better protect taxpayers when things go wrong', Chancellor George Osborne has announced.

As unveiled in the banking reform white paper, high street banks are to be ring-fenced into separate retail and riskier investment banking operations to prevent future public bailouts of city banks.

An independent risk committee will also be set up to manage ring-fenced banks, which will still be able to offer simple hedging products, such as protection against interest rates, to small businesses.

Speaking at the annual Mansion House speech, George Osborne said: "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."

He also announced that the Government and the Bank of England will work together to fund a new bank lending scheme, worth between £80-£100 billion, which it hopes will support the flow of credit to the public and businesses, and inject 'confidence' into the financial system.

The white paper follows recommendations made by the Independent Commission on Banking (ICB) report by its Chair Sir John Vickers, although some critics have argued the proposals been watered down.

Speaking to the national press, Sir John Vickers 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."

The leverage ratio for big banks - the amount of additional capital they must retain in order to withstand shocks to the markets - will be three per cent, lower than the four per cent originally advised. The white paper said it did not see the case to increase the level beyond the international normal of three per cent.

Commenting on the new 'funding for lending scheme', Which? executive director Richard Lloyd, welcomed the move, but added: "We want to see clear safeguards in place to ensure that banks pass this cheap credit on through loans to small businesses, and to consumers through lower interest rates on their mortgages."

"For too long, banks have taken advantage of the lack of competition on the high-street to increase the interest rates charged on mortgages, loans and overdrafts."

Director general of the British Chambers of Commerce (BCC), John Longworth, said a more competitive lending environment needed more than ring-fencing of retail operations.

"When dealing with big changes to the regulatory framework for an industry of such massive size and scope, the guardians of change need to ensure that smaller measures to promote competition do not get lost behind the bigger headline-grabbing measures. Only then will we come close to achieving a good deal for business customers."

The banking reform white paper is open for consultation until 6 September 2012.