UK banks are facing massive reforms
The UK's top banks are facing a costly overhaul after a Government-appointed commission unveiled a far-reaching package of reforms aimed at getting taxpayers "off the hook" in the event of future turmoil.
The Independent Commission on Banking's (ICB) vision for the sector, which should come into effect by 2019, includes ring-fencing banks' high street divisions to protect them from riskier investment arms.
Elsewhere in its highly-anticipated report, the ICB said banks should set aside a larger cash base than currently required to cushion the blow of potential losses or future financial crises.
The 363-page report, published by former Office of Fair Trading boss Sir John Vickers, was described by the Treasury as "impressive" and an important step towards a new banking system.
But the Unite union said the proposals "kick the overdue reform of the banking sector into the long grass" and would bring immediate uncertainty to workers in the sector.
Banking shares - already volatile due to eurozone debt fears - initially reacted poorly to the tougher-than-expected report, particularly as the recommendations on capital cushions are tougher than internationally-agreed measures and have the potential to put UK banks at a disadvantage.
Barclays and taxpayer-backed banks Royal Bank of Scotland, which owns Ulster Bank, and Lloyds Banking Group all saw their shares slide more than 4% but later recovered ground.
Lloyds shares were helped by the ICB's decision not to recommend that the bank must sell more branches than the 632 it has been told to sell by EU regulators. But the report said the Government should ensure the sale leads to the emergence of a "strong challenger bank".
The ICB said the proposals - which will cost the four major UK banks around £4bn to £7bn a year to put in place - will "put the UK banking system of 2019 on an altogether different basis from that of 2007".
Sir John said the commission's recommendations would ensure banks were more self-reliant so the taxpayer "gets right off the hook". "Measures of this kind will do a lot to contain the damage, as well as to reduce the risks in the first place," he said.
The ICB said a retail ring fence - designed to protect everyday banking functions from riskier investment activities - would be designed to "make it easier and less costly to resolve banks that get into trouble" and without taxpayers' help.
Ring-fenced banks should be the only operations granted permission by the UK regulator to provide "mandated services", which includes taking deposits from individuals and small businesses.
Ring-fenced banks should be separate legal entities, the ICB added, and have an independent board.
In addition, banks should hold an equity capital base - a buffer to absorb the impact of potential losses or even financial crises - of at least 10% of its risk-weighted assets.
The 10% requirement is greater than the 7% recommended by the Basel Committee on Banking Supervision, which has UK members, and effectively means banks will have to set aside more cash than previously required.