UK banking faces major shake-up

15 June 2011 Last updated at 13:26 GMT Ralph Silva from SRN Research says a ring-fence would make banking 'more expensive'

Chancellor George Osborne is backing proposals to force banks to ring-fence retail from investment banking.

In a speech on Wednesday he will say banks must be set up so that their High Street branches and savings and loans would not be damaged if their trading arms ran into trouble.

The legal separation of the functions of big banks was recommended by the Independent Commission on Banking.

He will also announce the privatisation of Northern Rock.

The former mutual was nationalised in February 2008, in the early stages of the financial crisis.

The BBC's business editor, Robert Peston, said the changes would represent "the most significant reform to our banking system since Big Bang in 1986 made it much easier for our giant banks to buy stock brokers and become huge in investment banking".

More protection

In his annual Mansion House speech, Mr Osborne will also say that banks should have to hold more capital to protect themselves against future losses than the new international minimum of 7% of their risky assets.

He will not put a figure on what minimum he will impose, but Treasury sources said that 10% would be "the right ballpark".

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The idea is not to make it impossible for banks to collapse - but to prevent their failures putting an unsustainable burden on taxpayers and the wider economy”

End Quote Robert Peston Business editor, BBC News The 10% minimum was another recommendation of the Independent Commission on Banking (ICB) in its interim report in April.

At the time, Mr Osborne welcomed the report, but he has not previously endorsed its findings.

The shadow chancellor, Ed Balls, has also given the commission his backing.

"To protect customers and taxpayers we need tough accountability and transparency and clear, workable and robust firewalls," he said.

The commission's final report, which is expected to give details of how banks' firewalls will work, is due to be published on 12 September.

The chancellor will announce in his speech how he plans to relinquish state control of Northern Rock.

The former mutual has been split into a "good bank", containing customers' savings and about 70 branches, and a "bad bank" containing the more toxic loans.

The former is set to be sold, while the latter will continue to be owned by the Treasury.

However, Mr Balls called for Northern Rock to be mutualised rather than sold off, and accused Mr Osborne of failing to give the option serious consideration.

Disagreement

According to Robert Peston, the purpose of ring-fencing is to ensure that in a major crisis "a retail bank could be hived off and saved by the Bank of England at less cost to taxpayers, because the investment banking part of the same bank would be allowed to fail".

"The minutiae of how retail banking operations are to be insulated from investment banking are yet to be worked out. The practical and legal challenges are formidable."

Angela Knight of the British Bankers' Association conceded that the banks had different views on how this should be done.

"There's a lot of issues and a lot of details that needs to be thought through and discussed," she said.

Stephen Hester, chief executive of the semi-nationalised Royal Bank of Scotland, told MPs last week that putting retail banks into separate subsidiaries could increase the riskiness of the banking system and put up costs for banks and their customers.

But the boss of HSBC, Doug Flint, told the same committee hearing that ring-fencing was a good idea.

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Bottom line - the price of the products is going to go up for everyone in the UK”

End Quote Ralph Silva Banking analyst, SRN Research Some commentators have said the government should go further, and completely separate investment banks from retail banking altogether, instead of allowing them to remain as ring-fenced businesses within the same company.

"While [ring-fencing] is intellectually a sound move, the problem is that in practice, with the pressures of the real world, the ring fence will not be completely... watertight," said Lord Lawson, who was Chancellor of the Exchequer under Margaret Thatcher.

"I'm quite sure the banks would like them to be permeable."

Speaking to BBC Radio 4's Today programme, he said there would need to be two totally different cultures - "prudence and caution" in retail banking, and a "go-go" culture in investment banking.

"If investment bankers make a mistake, they should go bust," he said, and it was "absolutely intolerable" that they could be bailed out along with the retail banks.

Subsidy removed

The reforms are not expected to make the UK banking system completely risk free, according to Alistair Milne of the Cass Business School.

"I don't think anybody on the Vickers Commission thinks [ring-fencing] is a magic solution that will make all potential banking problems go away," he told the BBC, although he said it would make High Street banking safer.

Instead, Mr Milne said it was about "removing the clear subsidy that has existed in the past" that enabled banks to "borrow cheaply on the basis of having all their retail activities, and use that for quite risky business".

However, removing this subsidy will not be cost-free for banks' customers, according to banking analyst Ralph Silva of SRN Research.

"Bottom line - the price of the products is going to go up for everyone in the UK," he told the BBC, estimating that the increase in cost for customers would be 10-15%.

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PM standing firm on NHS shake-up

16 May 2011 Last updated at 12:06 GMT David Cameron: "The big killers of the past are becoming the lifelong conditions of the future"

David Cameron has said the NHS in England needs to change to avoid a "future crisis" as he sought to rally support for a controversial shake-up.

Speaking to health staff, the prime minister said the NHS was performing well but faced "enormous financial pressures" as people lived longer.

But he hinted at concessions on plans to give GPs more control over budgets and the private sector a greater role.

Labour said NHS professionals believed the plans were a "complete shambles".

'Listening'

Ministers have promised "substantial" changes to the proposals contained in the Health and Social Care Bill after calling a "pause" to their progress pending the results of a "listening exercise" involving patients, doctors and nurses.

Amid unease in Lib Dem ranks, Deputy Prime Minister Nick Clegg has warned his party will block the proposals unless they are altered.

In a speech at a London hospital, in which he drew on his family's experience of the NHS, Mr Cameron said he "loved the NHS" and it was the "most important" institution in the country for his family.

But while pledging "never to take risks" with the health service's core principles, he said there were growing problems due to too much waste, inflexibility and top-down control.

"It is because I love the NHS so much that I want to change it," he said. "It needs to change to make it work better today and it needs to change to avoid a crisis tomorrow."

Increased life expectancy, the rising cost of drugs and public health challenges - such as growing levels of obesity - could leave the NHS facing a multi-billion pound funding shortfall unless action was taken, he added, while wide disparities of quality of service and of health outcomes need to be addressed.

Health costs

"Sticking with the status quo and hoping we can get by with a bit more money is simply not a serious option," he said.

"There's only one option we've got and that is to change and modernise the NHS, to make it more efficient and more effective and above all, more focused on prevention, on health, not just sickness. We save the NHS by changing it."

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The problem with this bill is that it is expensive, bureaucratic, and it is not properly thought through”

End Quote Ed Miliband Labour leader Mr Cameron stressed that the plans, drawn up by Health Secretary Andrew Lansley, would not be abandoned and sought to quash opposition claims that they could lead to full privatisation of the NHS, saying there would be "no competition for competition's sake".

But he said the changes needed "to be delivered in the right way" and he wanted doctors and nurses "with, not against" the proposals.

"We are listening and we will make substantive concessions to the reforms based on what we hear," he said, adding that he would be "held accountable" for any amendments to the proposals.

Among these, he promised a role for consultants, nurses and other professionals - not merely GPs - in the commissioning of care and that there were would be no "cherry picking" of services and patients by the private sector.

But BBC Health Correspondent Branwen Jeffreys said there were no further details about limits on the role of the private sector - which unions are demanding.

'Not thought through'

Critics of the proposals say they were not included in the government's coalition agreement and attempting a major re-organisation when the NHS having to find billions in efficiency savings is foolhardy.

Continue reading the main story Norman Smith Chief political correspondent, BBC Radio 4

It's a sign of how far the government has been forced on to the back foot over the NHS that Mr Cameron is having to go out and make the case for change all over again.

The fear must be that the electorate are quite happy with the health service and don't see why there needs to be sweeping change.

There must also be a concern that despite Mr Cameron's best efforts, voters still don't quite trust the Tories with the health service.

Hence the prime minister will again stress his personal commitment to the health service and restate how three letters still sum up his priorities, N-H-S.

However, as well as trying to win over public opinion, Mr Cameron is also sending out a clear message to critics at Westminster that the "pause" to review the health bill is not the same as a "full stop" - and there will still be major changes.

Ahead of the speech, the chairman of the doctors' union, the British Medical Association, called for major alterations to the government's plans.

"We believe that the bill has to be radically changed and probably so radically that, in essence, it would really be a different bill," Dr Hamish Meldrum told BBC Radio Four's Today programme.

"It would be better to withdraw this bill and produce a new one. Nobody is saying there needs to be no change in the NHS, but the sort of change that is contemplated with the details of this bill are not the right changes."

Labour have have questioned whether the proposed legislation in its original form can continue.

"All the evidence is that the prime minister is going to press ahead with a bill that nobody voted for, is not properly thought through, and which NHS staff have been telling me are a complete shambles," opposition leader Ed Miliband said.

"The problem with this bill is that it is expensive, bureaucratic, and it is not properly thought through."

And shadow health secretary John Healey said the government's proposals needed a "root and branch" rethink.

"He (David Cameron) made the case for change in the NHS but not the changes in his bill."

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