Cameron drops strongest hint of support for banking firewall

Story highlights

  • Britain PM hints he will back recommendations to build a firewall around retail banking operations
  • The hints come before a report on banking reform is released Monday
  • Government officials say PM David Cameron will give big banks time to adapt to the reform
David Cameron has given the strongest signal yet that he will back recommendations to build a firewall around Britain's retail banking operations, but he wants to delay the implementation of the structural upheaval for a number of years.
The prime minister's allies say he is anxious about the impact of radical and costly reform on the banking sector at a time of flat growth and is opposed to anything that would undermine business lending and impede the recovery.
But colleagues say Mr Cameron is prepared to back the changes -- to be outlined on Monday in Sir John Vickers' long-awaited report on banking reform -- if the split between retail and riskier investment banking is phased in after the planned 2015 election.
Senior government officials say Mr Cameron has agreed to a compromise -- endorsed by George Osborne, chancellor, and Vince Cable, business secretary -- that will give the big banks time to adapt to the reform.
Mr Osborne will bring forward legislation in this parliament to set in stone the broad proposals of the Independent Commission on Banking.
The legal framework would give banks some certainty and satisfy Mr Cable's insistence on urgent action -- a key part of the coalition agreement. But implementation of the split for the likes of Royal Bank of Scotland and Barclays would not start for a number of years and would be phased in.
Mr Cameron signalled his approach in the Commons on Wednesday, when he told MPs that guaranteeing the recovery took priority over a rush to restructure the banking system.
"It seems to me there are two vital things we have to secure -- a safe and secure banking system for the future, but also proper bank lending, including to small businesses, right now in our economy," he said. "That is what government policy will be aiming for."
The government's position is now closely aligned to the expected recommendation of Sir John's team, which will hand its report to the Treasury on Friday before its formal launch.
The BBC reported Thursday night that Sir John would recognise that the ringfences should be build over a number of years, in recognition of the great technical difficulties that banks would face. His report would also propose quick and precise legislation to give the banks certainty.
Banks are braced for two main structural recommendations. Ringfencing is the biggest concern, because it threatens to eliminate current funding efficiencies that big diversified banks enjoy by erecting a barrier between their core retail operations and their higher-risk investment banking businesses.
In addition, the commission is set to define the amount of additional loss-absorbing capital, on top of core equity requirements, that it believes banks should carry. It is expected to say that they should hold bonds whose value can be cut in times of crisis, or so-called contingent convertibles that could flip into equity, equivalent to at least 5 per cent of assets weighted for risk. That would be in addition to its interim recommendation of a core equity ratio of 10 per cent for ringfenced entities.
But banks -- and their investors -- have argued for months that to impose such changes in the current environment, on top of ongoing global regulatory changes, could be counter-productive. The market's nervousness is even more acute now that the eurozone sovereign debt crisis has worsened.