The government has announced plans for a shake-up of the banking sector, in response to the global recession, in its banking reforms White Paper.
Unveiled by financial secretary Mark Hoban, the proposals follow recommendations made by the Independent Commission on Banking (ICB).
The ICB was set up to make the banking system in the UK fairer for consumers, and has made a number of recommendations to the government.
Many of those recommendations were heeded, with the government saying that the proposals will give savers and banking customers more protection.
“The government will ring-fence retail deposits from the risks posed by international wholesale and investment banking,” Mr Hoban told the House of Commons.
“A ring-fenced bank will be economically and legally separate from the rest of the group and run by an independent board.”
The government was praised for following many of the ICB’s recommendations, although many argued that it should have gone further.
“The White Paper proposals are far-reaching, but on some points – such as limits on the leverage of big banks – we believe they should go further,” said Sir John Vickers, who chaired the ICB.
“We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness.”
Richard Lloyd, executive director of consumer watchdog Which? said the government should follow the ICB’s recommendations as closely as possible.
“Plans to ring-fence high street banking from riskier investment banking are a major step towards restoring consumer confidence and transforming the culture of banking,” he said.
“The Government must ensure that the competition recommendations of the Vickers’ Report are fully enacted and seize this opportunity to increase competition and choice on the high street and boost ailing consumer confidence.”
While the plans were welcomed by many experts and consumer champions, the banking sector has said they will harm British banking and could have a negative impact on the economy.
“We understand the Government’s desire to bring security to depositors, to provide more financial stability and to protect the retail part of banking from the riskier wholesale activities. However the ring fence as currently proposed has a number of downsides,” said Angela Knight, outgoing chief executive of the British Bankers’ Association.
Concerns have also been raised about the cost of the reforms, which could run up to £7 billion a year. The taxpayer will have to foot the bill for this, with the cost of mortgages and loans expected to rise.