British banks face huge reform

As banks across Europe came under renewed pressure, Britain's government proposed a radical industry makeover.

Finance minister George Osborne said that the Coalition would begin drawing up new legislation backing the government-appointed commission's call that banks such as HSBC and Barclays implement sweeping reforms by the end of the decade.

They are facing radical change in order to avoid a repeat of the massive state bailouts of lenders, including Royal Bank of Scotland, in the wake of the 2008 financial crisis.

The Independent Commission on Banking, chaired by ex-Bank of England chief economist John Vickers, recommended in a final report that lenders' retail operations should be protected against losses at their investment units.

British banks should also increase their capital buffers far above levels decided under the international Basel III agreement, while the sector should also face greater competition for the benefit of customers, the ICB said.

The commission meanwhile estimated that the annual pre-tax cost to lenders of the reforms would total between £4.0 billion and £7.0 billion ($6.3 billion-$11.0 billion). Analysts said the higher charges risked being passed on to clients.

Vickers told a press conference on Monday that the "status quo was not an option" for Britain's banks.

"The commission believes that banks should be strongly encouraged to implement any operational changes as soon as possible," the ICB said in its report.

"But, particularly given the additional capital the measures will require, an extended implementation period would be appropriate for what amount in combination to fundamental and far-reaching reforms intended for the longer term.

"Implementation should however be completed at the latest by ... the start of 2019," the report added.

Osborne backed the recommendations and said "the government will now get on with implementing the Vickers report.

"We have a commitment now to legislate and get the rules in place while this government and this parliament is sitting. Then it will take some time for the full rules to take effect but that is what John Vickers himself recommends."

The British Bankers' Association, which also represents state-rescued Lloyds Banking Group, warned that careful consideration must be given to the reforms and their impact on economic recovery.

"Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally," the BBA said in a statement.

"It is vital that the full impact any further reforms will have on the economy, the recovery and banks' ability to support their customers in the UK is understood."

It has been widely reported that Britain's banks strongly lobbied for the reforms to occur after the country's next general election in 2015.

There are fears that swift implementation of ring-fencing amid renewed weakness in the global economy could pressure Britain's biggest banks to relocate abroad. HSBC and Barclays are both rumoured to be considering moving their headquarters away from Britain.

The ICB said on Monday that Britain's banks should hold at least 10 percent core equity against their assets -- significantly more than the 7.0 percent required by the end of the decade under the Basel III rules agreed last year.

Banks should also have a loss-absorbing capacity of between 17-20 percent of its total assets, including the equity capital base, the commission said.

It additionally called for improved measures to help consumers switch current accounts.

Osborne's creation of the ICB in June 2010 followed fierce criticism over so-called casino banking -- a term used to describe the high risks taken by investment bankers denounced for their role in the global financial crisis.