The reforms will effectively remove the implicit state guarantee standing behind investment banks and will increase their cost of borrowing.
This is because insisting that retail and investment banking divisions are separately capitalised means traders cannot use retail deposits as collateral against big investments.
The government did compromise with the big banks on one key area of the report. The Treasury will accept a watered down recommendation from the Vickers report on capital requirements. This is the proposal that the biggest UK banks should have enough capital, plus loans that could be converted into capital, to cope with losses equal to one-fifth of the size of their total balance sheet.
HSBC successfully argued that it would be disproportionately expensive for it to do this. It estimated that the proposal would it cost more than $2.1bn a year.
The Treasury altered the proposal to apply to just the banks’ British balance sheets rather than their global assets, substantially reducing the cost to the likes of HSBC which has larger assets outside the UK than within it.
While the government said taxpayers should not have to bail out lenders in the future, Prime Minister David Cameron also wanted to ensure the regulations did not harm London’s standing as a leading financial centre.
Angela Knight, chief executive of the British Bankers’ Association, said an initial “white paper” on the ICB reforms was expected in 2012 adding that Monday’s statement would start a formal process rather than conclude one.
Knight also said that while banks were “committed to working with the government” over the reforms, the top banks were set to continue lobbying as reforms drew nearer.
The ICB has said banks should have until 2019 to implement the proposals.
Gary Greenwood, analyst at Shore Capital, said: “The capital requirements are quite strict but the timetable for implementation is quite generous. Analysts had always expected that the government would tick through the reforms.”
Adrian Coles, director general of the Building Societies’ Association, said: “We are pleased that the government is standing by its initial statement on the Vickers report and plans to legislate to ringfence the retail operation of banks.
“We remain hopeful that the implementation of these measures is proportionate to the risks posed.
“We strongly welcome the government's suggestion that there may be a case to modernise the Building Societies Act and we would urge that work on this begins soon. Also, it is gratifying to have evidence that the Coalition commitment to foster diversity and promote mutuality has not been forgotten.
“We look forward to much more in this space. Building societies and other mutuals are already providing credible competition to the large banks in a way that particularly chimes with consumers today.”
John Cridland, director general of the Confederation of British Industry, said: “Businesses want reform in the banking sector to make the system more stable, competitive and free from taxpayer support.
“It’s encouraging that many of the ideas for greater competition that the CBI has been calling for, including making switching easier and improving pricing transparency, will be taken forward.
“The government must ensure that the benefits of ringfencing outweigh the costs and that the boundary of the ringfence is flexible enough to allow business customers to receive the services they need.
“Implementing the proposals must not restrict the availability of credit at a challenging time, and the government should ensure that the timescale for implementing the legislation recognises this.
“The new proposal on loss-absorbing debt is encouraging in reflecting the international nature of British banking.”
Peter Vicary-Smith, chief executive of Which? said: “The government is right to concentrate on the fast introduction of retail bank ring-fencing. People are sick and tired of losing money on bailouts and want their savings to be protected from risky investment banking.
“It’s vital that steps are taken to promote choice on the high street but Lloyds is already a mega bank and needs to be forced to sell more branches. Without strong action, consumers will continue to pay the price for a lack of competition.
“People have told us that portable bank account numbers will encourage them to switch their current accounts. Banks will only feel the pressure of real competition when customers vote with their feet and portable account numbers will give people the tool they need to do that.”
