By Simon Miller
The UK government has confirmed its intentions to ring-fence retail banking from investment banking.
The financial secretary to the Treasury Mark Hoban announced the publication of the government's white paper on banking reform where retail banks will be economically and legally separate from the rest of its group and run by an independent board.
"The ring-fence won't stop a bank failing, but it will insulate the deposits of families and businesses and, if a bank does fail, these essential parts of the banking system can continue without recourse to the taxpayer," Hoban told the House of Commons.
Retail banks will be able to offer simple hedging products, subject to the necessary safeguards, but they will be prohibited from carrying out the vast majority of international wholesale and investment banking.
Hoban continued: "This will ensure that a ring-fenced bank does not take excessive risks when managing its own risks, as was the case in JP Morgan's recent much publicised trading loss."
However banks with less than £25bn of mandated deposits will be exempt.
As expected, British banks will have to hold an additional 3% of equity on top of the Basel III minimum standards of 7% and the government "strongly endorses" the introduction of a binding minimum leverage ratio of 3% for all banks.
Large ring-fenced banks would also hold a minimum amount of loss absorbing capacity made up of equity or debt of 17% of risk-weighted assets but for the likes of HSBC, their overseas operations should be exempt unless they pose a risk to financial stability.
In addition. the government will be working with European partners to introduce bail-in mechanisms so that bondholders bear the loss of a failed bank while the principle of depositor preference for insured deposits will be introduced.
"Unsecured lenders to banks are better placed to monitor the risks that banks are taking on and they should take losses ahead of ordinary depositors," Hoban said.
The finance secretary said that analysis suggested that the proposals would cost, in GDP terms, in the region of £0.6 to £1.4bn per annum compared with an estimated cost to the UK economy of £140bn for the 2007-2009 crisis.
"So these proposals, while ambitious in scale, are proportionate in impact," he added. "They will promote financial stability while supporting sustainable growth and maintaining the UK's role as the world's leading international financial centre."
Draft legislation will now follow in the autumn with all legislation will be in place by the end of this Parliament in 2015.