Osborne backs ‘split’ banks to tackle risk of financial crisis

Mr Osborne also announced the sale of Northern Rock to the private sector, three-and-a-half years after the bank was nationalised.

The Chancellor used his annual Mansion House speech last night to endorse interim proposals from the Independent Commission on Banking (ICB) to prevent High Street banks being exposed to the risks taken by “casino” operations.

He said the “new settlement” for financial services will allow the City of London to maintain its position as a global leader “without putting at risk the entire economy”.

In his speech Mr Osborne said: “As a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in our national economic interests.”

But he warned it should not be allowed to jeopardise the country’s economic stability and prosperity: “We should be clear that we want Britain to be the home of some of the world’s leading banks, but those banks cannot be underwritten by the British taxpayer.”

Mr Osborne said the ICB had put forward two key proposals.

“Bail-in instead of bail-out – so that private investors, not taxpayers, bear the losses if things go wrong. And a ring-fence around better capitalised high street banks to make them safer, and to protect their vital services to the economy if things go wrong.”

He has given his support to both these proposals in principle, although the precise nature of the firewalls between the retail and investment branches of banks such as Barclays, HSBC and RBS will not be known until the Vickers Commission publishes its final report on September 12.

Experts have warned the move could be costly, resulting in higher mortgage, loan and credit card costs for consumers. Northern Rock still failed without an investment banking arm.

Speaking last night, the Chancellor said the planned sale of Northern Rock to a single buyer was a sign that confidence was returning to the beleaguered banking sector and it would also mark “an important first step in getting the British taxpayer out of the business of owning banks”.

He said: “Images of the queues outside Northern Rock branches were a symbol of all that went wrong, and its chaotic collapse did great damage to Britain’s international reputation.

“Its return now to the private sector would help to rebuild that reputation. It would be a sign of confidence and could increase competition in high street banking. We could start to get at least some of our money back.”

Northern Rock was nationalised in February 2008 after it collapsed in the credit crisis, sparking the first run on a UK bank for 150 years. The Government split it in two last year, forming a mortgage and savings bank called Northern Rock Plc and Northern Rock Asset Management (NRAM) to house the more toxic loans. It is the former half – the so-called “good bank” – which is preparing to return to private ownership. The Government will retain ownership of NRAM, the “bad bank”.

The Governor of the Bank of England, Mervyn King last night reiterated the bank’s view that Britain faced more tough challenges ahead.

Mr King said the debt crisis which has hit Greece, Ireland and now Portugal would affect everyone and warned the need to reduce debt meant recovery would remain slow.

Meanwhile the Government will today outline its White Paper on financial regulation.

A permanent Financial Policy Committee will be established inside the Bank of England to “monitor overall risks in the financial system”, Mr Osborne said, while a Prudential Regulation Authority will be created to assess the stability of individual firms. A new financial conduct authority will be responsible for the operation of markets and protection of consumers.

Shadow Chancellor Ed Balls will today urge Mr Osborne to change course on deficit reduction, warning that the Government’s plans risk long-term damage to the UK economy.