Vickers report calls for a ring-fence around high street banks

Britain's biggest banks should separate their high street banking from their riskier investment banking operations, according to a major report on the future of banking.

The Independent Commission on Banking, chaired by Sir John Vickers, published its final report on 12 September.

The ring-fence

The central proposal is that banks should put their retail operations, which serve ordinary customers and small businesses, inside a ring-fence, separate from their investment banking activities.

The ring-fenced banks would have their own boards and their own capital, so that if the investment side ran into trouble, the high street bank would be protected.

The aim is to ensure that taxpayers never again have to bail out banks to protect ordinary depositors, as happened during the financial crisis of 2008.

Stronger buffers

The commission also recommended that the largest banks should hold more capital, money that can absorb losses, than international rules require.

It said the changes should be in place by 2019.

Cost to the banks

The commission estimated that the reforms would cost the banks between £4 billion and £7 billion a year. Banks have warned that the changes could make them less competitive against foreign rivals and reduce lending.

Barclays and Royal Bank of Scotland, which have large investment banking arms, are likely to be most affected.

Government support

The Chancellor, George Osborne, has welcomed the report and said the government intends to put its main recommendations into law.

The Business Secretary, Vince Cable, has long called for tougher controls on banks and has also welcomed the proposals.

Competition

The report also called for more competition in banking. It recommended that Lloyds Banking Group should sell more branches than it had already agreed, and that it should be made easier for customers to switch bank accounts.

A cautious welcome

Campaigners have broadly welcomed the report, although some argue that the banks should be split up completely. Others say the proposals do not go far enough to tackle high pay and bonuses.

A fragile economy

The report comes at a difficult time for the British economy, which is growing only slowly, and for Europe, where the debt crisis in countries including Greece is causing fresh turmoil in financial markets.

Banks say they need time to adjust to the new rules without harming their ability to lend.