MPs call for 'radical' reform of banking to avoid future bail-outs

A "RADICAL" overhaul of the UK banking system is needed to prevent taxpayers picking up the bill for future bail-outs, MPs will say today.

The Treasury Select Committee is urging ministers not to rule out the break-up of "too-big-to-fail" banks when considering future reforms of the sector.

But MPs also warn that planned moves, such as living wills to wind up banks in an orderly fashion, are likely to raise the cost of credit for customers.

The government has said it is against splitting up major players, arguing that both "narrow" safer banks and riskier investment banks were hit during the financial crisis.

However, the committee of MPs says the debate should "remain as wide as possible" and it highlights US reforms which would potentially limit the size and scope of bank activities.

The committee is also questioning the ability of big banks to spread risk and is calling for research on whether a larger number of specialist banks could be better for the economy.

The committee's chairman, John McFall MP, said "radical action" on reform is needed.

He said: "During the financial crisis, governments have effectively stood behind the banking system.

"If international banking in the UK is to remain credible, reform must ensure that the taxpayer is better protected from picking up the bill."

The committee also acknowledges that the introduction of "living wills" for banks would transfer some of the risk from taxpayers to the financial sector.

"This may raise the cost of credit, but it will do so because risk is priced more accurately," the report says.

Mr McFall added that the reckless lending of the boom years should not be replaced with "equally irrational restrictions" on the banking industry, but said he feels policymakers need to strike a balance between changing the system and protecting consumers.

He said: "The more consumers are protected, the more risks taxpayers may have to bear, the more banks have to pay for their capital, the higher the rates they will charge their customers.

"Policymakers will have to decide where the trade-offs should properly be made and how this should be explained to the public."

Meanwhile, reports yesterday claimed the government is considering plans to start offloading its stakes in Lloyds Banking Group and Royal Bank of Scotland just weeks after the forthcoming general election.

UK Financial Investments (UKFI), which oversees the government's bank assets, is looking at proposals to sell bonds that can be swapped for shares in Lloyds and RBS, bailed out by the government during the financial crisis, according to reports in Sunday newspapers.

It is thought these so-called "convertible gilts" could be exchanged for shares once certain price targets are met that would give the taxpayer a profit – and could be launched for sale as early as June.

Treasury plans for its bank interests have been in sharp focus recently with the general election looming and following recent rises in Lloyds and RBS share prices.