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George Osborne will on Monday throw his weight behind measures aimed at introducing more competition to UK high-street banking and buttressing taxpayers against a future financial crisis.
In his official response to reforms set out by the Vickers commission, the chancellor is expected to trumpet recent developments in retail banking that prepare the ground for two serious new competitors – Virgin Money, which bought the nationalised lender Northern Rock last month, and the Co-operative Group, which has been selected as the preferred bidder for a portfolio of 632 Lloyds Banking Group branches.
Meanwhile, current account customers are in line for a boost as Mr Osborne is likely to urge banks to press ahead quickly with plans to make it easier and quicker to switch between providers.
People who have seen the draft report say it will follow through on Mr Osborne’s early backing of the Vickers proposals in September, particularly its core concept that banks’ high-street operations should be ringfenced and made safe from their riskier investment banking business.
But the response, which is expected to run to about 80 pages, will not provide much detail on the finer points of structural reform.
In particular, Mr Osborne is expected to be non-committal on the sensitive issue of how much new loss-absorbing bond issuance banks should be forced into. Banks led by HSBC and Standard Chartered have argued vociferously that they would face vast additional costs from this element of the proposals.
While most lenders could simply replace existing bond issuance with new loss-absorbing instruments, HSBC and StanChart would ironically be penalised for having a safer deposit-based funding profile, with fewer existing bonds in issue. HSBC has estimated that it would have to issue $55bn of new debt at an additional cost of $2.1bn.
Mr Osborne is not expected to reject this proposal altogether, opting instead to gather further feedback from interested parties. He is also likely to launch a consultation on the impact of a proposal to prioritise depositors over bondholders.
“Given the fragility of banking at the moment, any announcement will have to be carefully framed,” Andrew Tyrie, chairman of the Treasury select committee, told the Financial Times.
Even the core ringfence idea will not be pinned down in detail in Monday’s document, with practical matters of how it should be applied to be left to regulators at the Financial Services Authority.