Britain urged to split banks if rules fail

Britain should force all banks to split routine retail operations from riskier investment activities if a single lender abuses new rules designed to protect taxpayers, an influential parliamentary panel said.

The UK's Parliamentary Commission on Banking Standards, which has been asked to find ways to reform banks, also said on Monday that Britain's financial regulator should be given the responsibility to decide how far banks can leverage their capital for investment and lending. The government's Banking Reform Bill is due to be debated in parliament on Monday. But Conservative MP Andrew Tyrie, who heads the commission, said that current proposals to change the industry fall short of what is required.

"There remains much more work to be done to improve the Bill," he said in a report published ahead of the debate.

Britain is determined to prevent a repeat of the need for taxpayer-funded bank bailouts after the £65 billion ($97 billion) double rescue of Royal Bank of Scotland and Lloyds Banking Group in 2008. The commission was set up amid public outcry after Barclays was fined for rigging global interest rates, the latest in a string of banking scandals including the mis-selling of loan insurance and complex interest rate hedging products to small firms.

Chancellor George Osborne said in January that he would take up a recommendation made by the commission that the government should have the power to break up any individual bank that tries to find a way around the new laws.

The commission, which was asked to assess government plans before their introduction, wants the Bill to go further and introduce rules giving Britain the power to break up every bank should even one institution break the rules.

'Investor uncertainty'
All the leading British banks, including Barclays, HSBC and RBS, will be affected by the legislation.

The industry, however, has warned that the severity of the proposed reforms - more rigorous than those in France and Germany - could put British banks at a disadvantage against continental rivals such as Deutsche Bank and BNP Paribas.

"This will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses," the British Bankers' Association (BBA) said last month.

The BBA's plea appears to have held little sway with the commission and Tyrie said that a "second reserve power for full, industry-wide separation" needs to be included. However, he said that action should be taken by the financial regulator only after independent review and with approval from the finance ministry.

"The Bill would be strengthened by making specific provision to consider the case for full, industry-wide separation if the ring-fence is judged to be failing. As is appropriate, the final decision would lie with the government and parliament and not with the regulator," the commission said in its report. It is also recommending the introduction of a periodic review of whether banks are sticking to the rules.

Among the proposals to rein in risk-taking is the leverage cap. The commission wants this set at 25 times banks' capital. The government wants a weaker cap of 33 times capital, which the commission's report said is "unlikely to provide a robust enough backstop".

The commission called on the government to delay pushing through the Banking Reform Bill until its final report is published in May.

"The task of sorting out the banking industry, of which this bill will form a major part, is absolutely essential for the long-term health of the British economy. Let's get it right," the commission said.