BBC News - Osborne to address MPs on Vickers' report into banking

Chancellor George Osborne is expected to announce to MPs that he will legislate to separate retail banking from more risky investment activities.

Mr Osborne will give a statement to Parliament after the government publishes its response to the report

The move was recommended by Sir John Vickers in his report into banking, launched after the financial crisis.

Business Secretary Vince Cable told the BBC on Sunday that the government would accept the report "in full".

However, BBC Business Editor Robert Peston has learned that reform may not be the 100% as originally billed.

In one key area the banking industry has succeeded in getting the Treasury to water down one of Vickers' recommendations, he said.

This is the proposal that the biggest UK banks should have enough capital plus loans that could be converted into cash to cope with losses equal to one fifth of the size of their total balance sheet.

As Robert Peston understands it, HSBC has successfully argued that it would be disproportionately expensive for it to do this. In HSBC's case they are much bigger outside the UK than inside.

If they had to raise up to 20% of their global balance sheet they would have to raise huge amounts of expensive new capital or loans. The Treasury is to soften the blow. It will do this by requiring the big banks to raise capital and loans equivalent to 20% of that part of their balance sheet, which British tax payers would have to support in a crisis.

Banking overhaul

However, our correspondent said Sir John Vickers and his commissioners had been successful in achieving most of their aims, and the UK's financial system will be overhauled.

"Our banks will in the coming five years be forced to undergo significant financial, cultural and managerial reconstruction."

Labour's shadow business secretary Chuka Umunna said the recommendations needed to be implemented in full. He told the BBC it was important that Britain had a system that could provide businesses with the credit they needed.

"Now, we still have short-term issues with the access to credit that businesses are facing, they're having problems with, and we need to make sure that it's not watered down. Which is one of the reasons we've said that the chancellor should ask Sir John Vickers to come back in twelve months' time and report on progress of implementation of those recommendations."

In the UK, the financial crisis started with Northern Rock being bailed out by the taxpayer, but went on to include both Lloyds and RBS receiving substantial sums of public money.

The Independent Commission on Bankingwas set up by the coalition Government last year to review the financial sector after the crisis.

It published its report in September and looked into ways of avoiding such bank failures in the future.

The report said it would "make it easier and less costly to resolve banks that get into trouble".

It recommended that a bank's retail business should be ring-fenced from its investment business, with this and other recommendations being implemented by 2019.

Mr Cable seems to be sticking to this timetable, promising on Sunday that "primary legislation will be done in this parliament".

He told the The Andrew Marr Show: "Our big banks were at the very centre of the financial crisis, what the Europeans call Anglo-Saxon financial capitalism. It needs reform."

Mr Osborne will give a statement to Parliament after the government publishes its response to the report.

Separate entities

The report recommends that ring-fenced banks should be the only operations granted permission by the UK regulator to provide "mandated services", which include taking deposits from and making loans to individuals and small businesses.

It says that the different arms of banks should be separate legal entities with independent boards.

Another of its recommendations is that banks must have a buffer to absorb the impact of potential losses or future financial crises - of at least 10% of domestic retail assets in top-quality form, such as shares or retained earnings.

That is a stiffer target than the 7% recommended by the international Basel Committee on Banking Supervision.

It also says the biggest banks should go further than this and have a safety cushion of between 17% and 20% of assets, made up of highest-quality assets topped up with bonds that can be easily converted to equity.

The commission also recommends that steps should be taken to make it simpler to switch bank accounts.

The Vickers report wants a free current account redirection service to be formed by September 2013, with an improved system to catch all credits and debits going to a customer's old, closed account, including automated payments on debit cards and direct debits.