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The chancellor has called on Royal Bank of Scotland to shrink its investment banking business significantly as a way to “clear up mistakes of the past” and assuage public anger towards the banks.
In a surprise move that came as George Osborne revealed his full support for a package of measures aimed at overhauling the structure of banks, he said the state-backed bank should refocus on its UK high-street and corporate banking operations.
“RBS should significantly reduce its investment bank … scaling back risky activities that are heavy users of capital and funding,” said Mr Osborne.
The chancellor took a harder-than-expected stance to protect taxpayers from bailing out the banks in future as he pledged to implement the full suite of proposals put forward by the Independent Commission on Banking in September with few compromises.
He said the government would press ahead with plans to introduce a so-called retail “ringfence” – a wall around banks’ core high street operations, separating them from investment banking.
On the key issue of additional capital buffers, the government made a slight concession, pledging that banks’ overseas arms could avoid the toughest rules if they had credible plans to wind up their businesses in a crisis.
Sir John Vickers, who led the commission, wanted banks to be forced to hold so-called bail-in bonds – or loss-absorbing debt – worth 7-10 per cent of their worldwide risk weighted assets on top of 10 per cent of equity capital.
HSBC and Standard Chartered, the two banks most severely affected by the proposal to increase the amount of loss-absorbing debt they should hold, had hoped their overseas businesses would be excluded completely.
Mr Osborne said banks would have to hold total loss absorbing debt of 17 per cent – the lower end of the Vickers recommendations – against their UK operations and the same on their worldwide businesses unless they could demonstrate that the taxpayer would not be on the hook if they failed.
The chancellor waved through Vickers proposals to introduce more competition in high street banking and to give depositors more protection against failing banks by ensuring they are first in line to retrieve their money.
On timing, he stuck to the proposal to give banks until 2019 to introduce all the changes, but said they should do so “as soon as practically possible”. Legislation would be finalised by 2015.