Bank shares tumble over ring-fencing plan

 

Shares in UK banks tumbled as investors counted the cost of the government's plan to separate high street branch networks from their riskier investment arms.

square mile

Reform: Banks will be forced to hive off branches from riskier 'casino' divisions

The banking industry is facing billions of pounds in extra costs as lenders erect firewalls around their retail operations to maintain the flow of credit during future financial crises.

The 'ring-fencing' proposals, formally endorsed by the Chancellor last night, will drive up overheads as banks will be forced to build separate IT and back-office systems.

They will also raise borrowing costs by eliminating unwritten taxpayer guarantees worth more than £10bn a year to UK-based lenders.

In his Mansion House speech last night, George Osborne gave his formal backing to the ringfencing plans put forward by the Independent Commission on Banking.

Hiving off retail banks would protect consumer deposits when the next crisis erupts and ensure that the state never again has to use taxpayer money to prop up failing institutions, according to the Chancellor.

The reforms fall short of a full-blown break-up advocated in the past by Bank of England Governor Sir Mervyn King and Business Secretary Vince Cable.

Although the full details of the shake-out won't be known until the Independent Commission on Banking publishes its final report in September, the proposals would reduce profits and dividends across the sector.

The ICB estimates that British banks currently enjoy an implicit subsidy of more than £10bn a year because of the expectation that taxpayers would step in again should disaster strike.

Royal Bank of Scotland recently revealed that it enjoyed a benefit of as much as £4.8bn a year by combining its retail and investment wings.

Last week RBS boss Stephen Hester warned that the ICB's ring-fencing proposals would entail 'greater costs', which would be 'divided between shareholders, customers and the economy as a whole'.

It is likely that banks will pass on the bulk of the increased overheads, with consumers 'left facing higher mortgage, loan and credit card costs', warned Steve Davies of PwC. RBS shares fell 0.8p to 40.745p and Barclays closed 7.15p lower at 257.375p.

Osborne last night fired the starting gun on the long-awaited auction of Northern Rock. The Treasury's advisors at Deutsche Bank are expected to begin sending circulars to prospective buyers over the coming weeks.

The aim is to re-coup the government's £1.4bn direct investment in the Rock, which was nationalised in 2008.