Britain's treasury chief warned the country's banks on Monday that they face being broken up if they fail to protect their retail operations from their riskier investment arms.
George Osborne told executives from JPMorgan that the days of banks being "too big to fail" are over in Britain, and that taxpayers shouldn't be expected to bail out the lenders. The next time a crisis hits, he wants more options to act.
"My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether — full separation, not just a ring fence," he said. "We're not going to repeat the mistakes of the past."
The new measure gives regulators the power to force a complete separation of a lender's retail business from its investment banking. Risky investments undermined banks' stability in 2008, leading to taxpayer bailouts of two big U.K. banks.
Osborne's remarks follow recommendations from the Parliamentary Commission on Banking Standards that proposals for a "ring-fence" to protect retail banks needed to be "electrified" to discourage banks from probing for loopholes. Osborne had been reluctant to accept the idea, but faced pressure stemming from public outrage over the behavior of Britain's banks.
Britain's banking industry, which accounts for 4.6 percent of annual economic activity, has been caught up in a series of scandals since the financial crisis in 2008. Several leading executives at Barclays have been forced to step down after the bank was hit with 290 million pound fine for rigging Libor, the rate at which banks lend to each other. Royal Bank of Scotland also faces a 500 million pound fine for manipulating the key interest rate. HSBC and Standard Chartered have also fallen foul with regulators over the way they do business overseas.
The banking standards commission said that the scandal of manipulating key lending indexes had "exposed a culture of culpable greed far removed from the interests of bank customers."
Bankers fear it will hurt the competitiveness of British banks and do little to make them more stable. The British Bankers' Association said the government's decision was "regrettable," and that it would create uncertainty for investors.
"No other major economy is considering moving away from the universal model of banking because it undermines banks' ability to provide all the services businesses need," the association said in a statement. "Above all, what banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow."
Other countries and regulators are also grappling with how to prevent future bailouts. In the United States, legislation known as the Dodd-Frank act seeks to bar banks them from engaging in risky trading on their own account. The European Union is also examining how banks might separate their riskier investment banking operations from the rest of their business.
Besides that, new international rules — known as Basel III — will require banks to hold more financial reserves to protect against possible losses. The requirements will be phased in over the coming years, but banks have said they are too demanding.