Britain likely to adopt bulk of advised bank reform

LONDON, June 13 Wed Jun 13, 2012 5:00pm EDT

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LONDON, June 13 (Reuters) - The British government will on Thursday say it will force banks to adopt the vast swathe of reforms recommended by an independent panel last year to safeguard taxpayers and the economy from future financial crises.

Finance minister George Osborne, taking forward the advice of the Independent Commission on Banking (ICB), will tell banks how the government will "implement those recommendations in detail" to stop problems in the sector "spilling onto our high streets".

"High-street (retail) banking will be ring-fenced so that taxpayers are better protected when things go wrong," he will say, according to extracts from his annual Mansion House speech to the financial elite in London.

The proposals will be published on Thursday in a White Paper - a formal government policy document that spells out the government's intentions - and are expected to be turned into draft legislation later this year.

The proposals were the result of a long study into the causes of the credit crunch which forced Britain to bail out several lenders.

There had been some speculation that the government, under intense lobbying from the powerful banking sector, would have to water down some of the tougher ICB recommendations, but the indications are that there will only be minor concessions.

The Conservative-led coalition government said in December it would push the reforms through broadly as they were.

"I believe that we have found a workable way to solve what I called the 'British dilemma' - so we are proposing to protect taxpayers in a way that does not make the UK uncompetitive as a home of global banks," Osborne will say.

RINGFENCE, CAPITAL BUFFERS

Central to the changes - to be in law by the end of 2015 and in place at banks by 2019 - is a move to separate retail operations from riskier investment banking operations.

Small banks which do not pose a risk to the financial system are expected to be exempted from the so-called "ringfence" but around 90 percent of deposits at bigger banks will be protected within it.

The ringfenced part of the bank should not be allowed equity in the non-ringfenced section and banks will also have to obey new governance rules to ensure an array of independent voices on their board.

Some simple derivative and hedging activity is likely to be allowed in the ringfenced retail section if it is necessary for small business banking services.

Another key plank of the changes aimed at shifting the risk away from taxpayers will see savers and depositors put first in line to get their money back if their bank fails.

Under the proposals, creditors would be the first port of call for funds to prop up a struggling institution.

Banks are also expected to have to hold enough capital to cover 17 percent of their assets as a safety net, going beyond international standards - a move that has been opposed by the financial sector which fears it could hamper their activities.

The government is expected to confirm that the non-UK operations of banks - primarily at institutions such as HSBC and Standard Chartered - will be exempt from those extra buffers as long as those operations could not endanger Britain's financial stability.

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