The financial crisis is very far from being over, but later today the Government is expected to announce what steps it intends to take to reform the banking system, which many believe was responsible for bringing the crisis about in the first place.
In what could turn out to be the biggest banking reform legislation in many years, ministers are proposing to revolutionise the UK banking system to provide greater protection for consumers and the economy at large.
Yesterday morning the secretary for Business, Innovation and Skills, Vince Cable, announced that the Government would be implementing the recommendations of the Vickers Commission “in full”.
The deadline included in the Vickers Report was 2019, but it seems likely that the Government will be pressing ahead with reforms in order to complete them by the end of the current Parliament, in 2015.
The fundamental principles of the legislation are that UK banks will in future have to ring-fence European retail assets and liabilities separately to those conducted domestically. In practice this means that the risky investment practices of the major banks will be ring-fenced away from the savings of its domestic customers.
The second major change is that retail deposits will rank ahead of unsecured loans in the event that a bank goes bust. In other words, if a banking collapse were to happen again, consumers’ savings and deposits would be honoured ahead of obligations to other banks and financial institutions to whom the bank is indebted. This should provide extra protection for UK savers, although some fear it will increase the cost of borrowing significantly.
The final change concerns the amount of capital which UK banks must have in reserve to protect itself against losses. The ceiling looks likely to be set at somewhere between 17-20% of their balance sheet.
It is unclear yet what this will mean for the public, but it is hoped that these measures will provide safeguards which will in turn help to restore confidence in the UK banking sector.
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