UK banks face overhaul to prevent new financial crisis
Chancellor George Osborne is expected to give his approval to plans to force banks to erect a protective firewall between their retail and investment arms, in a bid to prevent a repeat of the financial crisis of 2008.
Mr Osborne is expected to use his annual Mansion House speech tomorrow to endorse the proposals of the Independent Commission on Banking to protect High Street banks from exposure to the risks taken by "casino" operations.
The precise design of the firewalls between the retail and investment branches of banks such as Barclays, HSBC and RBS will not be known until the Vickers Commission publishes its final report on September 12.
The Chancellor is expected to consider Sir John Vickers' final recommendations before deciding exactly how the "ring-fence" will work and how the line will be drawn between retail and investment activities.
But it is understood that he will say that retail banking operations should have their own premises, IT systems, staff and funding, so that they are able to continue to function in the event of a failure by their investment arm.
High Street banks would be required to hold more capital, so that ordinary customers' savings are not put at risk if investment operations suffer heavy losses.
The Vickers Commission's interim report said in April that retail banking arms should be forced to hold capital of 10%, compared to the 7% demanded by international regulators for the entire bank.
And it indicated that the commissioners were minded to recommend a form of ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group, rather than by an entirely separate company.
At the time, Mr Osborne welcomed the interim report as a "very good piece of work" which had vindicated his decision to set up the Commission shortly after arriving at the Treasury last year.
But he has withheld explicit endorsement of its key recommendations until now.
A Treasury source said: "This is a far reaching shake up to make High Street banks safer and protect taxpayers.
"The Government set up the Banking Commission to ask the difficult questions that weren't asked before the crisis and this is right at the heart of their answer. Britain is now leading the world in learning the lessons from the disastrous failures of the last decade."
It is not yet clear whether legislation will be required to put the changes in place.
The Chancellor's audience at the Lord Mayor's Dinner in the Mansion House - one of the most high-profile set-piece speeches of his year - will include the Governor of the Bank of England Sir Mervyn King, as well as senior executives of the banks which will be required to shake up their operations.