Coalition to push on with plans to split banks, despite economy fears

A report by the Independent Commission on Banking (ICB) that proposed lenders should be forced to split their retail and investment banking arms to help prevent future bailouts will be backed by Chancellor George Osborne in parliament.

Mr Cable yesterday said the government was “going to proceed with the separation of the banks”. But with the planned reforms estimated to cost the industry up to £7 billion, there are fears they will slow lending at a time when the economy is in danger of sliding into recession.

The moves will heighten speculation that banks, particularly HSBC, will move their head offices away from London, depriving the UK of jobs and tax revenues.

Mr Cable said: “We have accepted the recommendations of the commission.

“It is absolutely right that we make the British economy safe. We just cannot risk a repetition of the financial catastrophe we had three years ago.

“Big structural reform of the banks was something we [Liberal Democrats] fought for and argued for, and now it is going to happen.”

Mr Osborne will today give a statement to parliament, after the Treasury publishes a detailed response to the report, which includes plans to force banks to hold more capital to help protect them against future crises.

He is expected to pledge to enact all primary and secondary legislation stemming from the report by the end of the current Parliament, with a white paper expected next year, according to reports. The reforms should be in place by 2019.

The Chancellor has come under pressure to water down the proposals from bankers, who claim they are unnecessary and could lead to higher costs for customers.

The Treasury is expected to confirm the ICB’s estimate that the plans could cost banks between £4bn and £7bn, although industry sources have claimed the true cost could be as high as £12bn.

It is expected that the Treasury’s report will not go as far as spelling out how the ring-fence will work in practice and will leave the detail to regulators.

The ICB, chaired by Sir John Vickers, former head of the Office of Fair Trading, was set up by the government last year to conduct a full review of the sector after the financial crisis four years ago left banks, including Royal Bank of Scotland and Lloyds, needing bailouts.

Tony Greenham, head of finance and business at the New Economics Foundation, said: “We welcome the government’s decision not to water down the Vickers Commission, but the ICB’s recommendations do not go far or fast enough to stabilise the banking system.

“2019 is a long time to wait for these reforms and leaves the public exposed in the increasingly likely event of another financial crash – we might have to bail banks out again.”

Chris Leslie, shadow financial secretary to the Treasury, said the ICB should be asked to draw up another report in 12 months on how much progress had been.

He said: “These are vital reforms to protect taxpayers and consumers in the future which the government must get on and legislate for rapidly.

“There must be no foot dragging and no watering down of these reforms.”