10/04 Vickers Banking Commission report to back 'firewalls'


The BBC's Robert Peston can reveal some of the proposals ahead of the announcement

An interim report from the Banking Commission due on Monday will not support the total break-up of Britain's biggest banks, the BBC understands.

Instead it will favour ring-fencing their risky investment banking operations, so they do not jeopardise the savings of ordinary depositors.

The move will still cause anger at big banks like Barclays, according to BBC business editor Robert Peston.

It means their investment banking units will find it more expensive to borrow.

"I understand that the Commission will recommend that within megabanks like Barclays, HSBC, or Royal Bank of Scotland, new legal barriers - or 'firewalls' - should be constructed," our correspondent said.

"So that if a crisis occurs in the investment bank it can't hurt our savings in the retail bank."

Danny Alexander, Chief Secretary to the Treasury, declined to comment on the report's details ahead of official publication.

But he told the BBC's Andrew Marr programme on Sunday that the government would put the interests of taxpayers' ahead of the interests of banks when considering a bank restructuring.

"The government will take its obligations to taxpayers first. It is in the interests of taxpayers that will be uppermost in our mind in responding to this report, in taking this issue forward, not the interests of the banks.

"We set up this commission because we have a serious problem which has caused enormous damage to our economy. These banks' balance sheets are 5 times the size of the British economy. We have to act on that and we certainly intend to," Mr Alexander said.

Universal risk

The Commission of five economists and bankers, chaired by former Bank of England chief economist John Vickers, was tasked with considering a full-scale break-up of banks - something Liberal Democrats had called for in their election manifesto.

The concern is that "universal" banks such as Barclays, which combine ordinary retail banking with investment banking, benefit from an unfair government guarantee.

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Parts of a universal bank such as Barclays, Royal Bank of Scotland and HSBC... would always be bailed out by taxpayers ”

Markets believe the government would never allow a big retail bank to go bust, because of the resulting losses to depositors and the disruption to the payments system.

But this guarantee means that the universal banks can borrow more cheaply, and use that money to fund their highly profitable, but more risky, investment banking businesses.

The new 'firewall' arrangement is intended to eliminate the possibility of losses at the investment banks being borne by the public purse.

Rating downgrades

It is expected that the Commission will recommend requiring the banks to put their investment banking operations into a separate subsidiary company that they own.

The subsidiary would have its own capital, which could be used by it to absorb losses, but which would be allowed to go bust if it became insolvent.

Barclays' chief executive, Bob Diamond, was bitterly opposed to the move in evidence he gave to the Treasury Select Committee in January.

It would force the banks to raise more capital for their investment banks, something the banks see as expensive and painful.

And markets are likely to see the ring-fenced investment banks as riskier credits, making it more expensive for them to borrow and undercutting their profits.

Rating agencies will be looking carefully at the report to understand how it affects the chance of banks being rescued by the government in future financial crises.

One agency, Moody's, said on Thursday that it will review ratings for 19 UK banks this year in light of the tougher regulatory environment, with many likely to face large downgrades.

The ring-fencing may mean that rating agencies give investment banks separate - and lower - credit ratings than their parent banks.

Lehman Brothers

However, critics may question whether the move will achieve its intended purpose.

It is unclear how strictly a retail bank would be restricted from supporting its investment bank - for instance through loans, guarantees or capital injections during a financial crisis.

Moreover, some may query whether the government itself would refuse to rescue a big investment bank during a financial crisis.

Former US Treasury Secretary Hank Paulson was heavily criticised for allowing the investment bank Lehman Brothers to fail, sparking the global financial crisis in September 2008.

15/02 Iceland parliament votes for new Icesave deal

Icesave site400,000 British and Dutch depositors were initially left out of pocket when Icesave collapsed

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Iceland's parliament has voted yes to a new plan to repay the UK and the Netherlands the 4bn euros (£3.1bn) they lost when the Icesave bank collapsed.

The money will be used to repay the UK and Dutch governments for reimbursing 400,000 citizens who lost savings when Icesave's parent, Landsbanki, collapsed late in 2008.

The terms of the agreement must now be approved by Iceland's president.

He said recently that this was much better than a previous deal.

He refused to approve the last parliament-backed repayment proposal.

But Iceland's Finance Minister Steingrimur Sigfusson told BBC Radio 5 that he thought the end of the matter was now in sight:

"In light of the strong majority that passed the bill today - more than two thirds of the members supported the bill - obviously that has importance in this context...it makes me more optimistic that now, finally, we will see the end of this very difficult case... hopefully it will be over and done with in a few weeks from now."

Under the terms of the latest deal Iceland will have longer to repay, and at a lower interest rate than before.

Iceland will pay the money back to the UK at a 3.3% interest rate between 2016 and 2046, rather than a 5.5% interest rate between 2016 and 2024.

The actual cost to the state is expected to be much less than the 4bn euros owed, as the government says most of the repayment will come from selling the assets of Landsbanki.

The government has said the cost could be a maximum 50 billion crowns (£265m).

Banking crash

Iceland's three main banks collapsed within days of each other in October 2008.

Iceland compensated its savers, but overseas savers faced losing all of their money.

The Netherlands and UK agreed to reimburse account holders in their countries and the Icelandic parliament agreed to the terms of a repayment deal in December 2009.

A referendum in Iceland overwhelmingly voted down the plan in March 2009, with the majority saying they, as citizens, should not be made to pay so much for their banks' bad decisions.

Late last year, the UK, Netherlands and Iceland agreed a new deal, pending approval by the Iceland parliament and president.

The issue of repayments created a diplomatic row between Iceland and the UK, as well as political controversy in Icesave's home country. It also created uncertainty over Iceland's economic recovery.

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10/04 Iceland rejects Icesave repayment deal

Nearly 60% of people were against the plan

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Icelanders have rejected the latest plan to repay the UK and Netherlands some 4bn euros lost when the country's banking system collapsed in 2008.

Partial referendum results show 58% voting no, and 42% supporting the plan.

Johanna Sigurdardottir, Iceland's Prime Minister, said the rejection meant "the worst option was chosen".

UK Treasury minister Danny Alexander said the decision was "disappointing" and the matter would go to an international court.

Dutch Finance minister Jan Kees de Jager said he would be consulting Britain about taking further steps against Iceland, but added that the matter would likely end up in court.

"I am very disappointed that the Icesave agreement did not get through. This is not good for Iceland, nor for the Netherlands.

"The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide," Mr de Jager said in a statement.

It is the second time a referendum has rejected a repayment deal.

Iceland's Landsbanki bank ran savings accounts in the UK and Netherlands under the name Icesave and investors there lost 4bn euros (£3.5bn; $5.8bn).

When it collapsed in 2008, the British and Dutch governments had to reimburse 400,000 citizens - and Iceland had to decide how to repay that money.

Mr Alexander, Chief Secretary to the Treasury, said on the Andrew Marr programme: "It's obviously disappointing... We tried to get a negotiated settlement.

"We have an obligation to get that money back, and we will continue to pursue that until we do... We have a difficult financial position as a country and this money would help," he said.

'Such a revulsion'

Iceland's parliament had backed the deal, but President Olafur Ragnar Grimsson refused to sign it, triggering the referendum.

Prime Minister Johanna SigurdardottirPrime Minister Johanna Sigurdardottir: "Disappointing numbers"

A previous deal, imposing a tougher repayment regime, was rejected in a March 2010 referendum by 93% of voters.

Finance Minister Steingrimur Sigfusson appeared to rule out a third attempt to persuade voters to accept a repayment deal.

"I think we're getting a very clear sign from this referendum, that further negotiations are ruled out. No use in trying that again."

The issue will now be referred to an international court, the European Free Trade Association Surveillance Authority, a process which could take several years.

Backers of a "yes" vote had argued the repayment deal was the best way to resolve the issue in terms of cost and risk to Iceland.

The "no" camp said the Icelandic taxpayer was under no legal obligation to pay for a private bank's losses and that the deal would put a heavy burden on the nation.

Longer period, lower interest

Under the terms of the rejected deal, Iceland would have paid the money back with 3.3% interest to the UK, and 3% to the Netherlands, over 30 years between 2016 and 2046.

Under the previous proposal, the money was to be paid back with 5.5% interest between 2016 and 2024.

Icelanders queue to vote in ReykjavikThe issue may now have to go to the courts

The actual cost to the state was expected to be much less than the 4bn euros owed, as the government said most of the repayment would come from selling the assets of Landsbanki.

The government has said it did not expect the cost to exceed 50bn kronur (£168m).

Analysts say a resolution of the issue is vital to Iceland's prospects for recovery because it would allow the country to return to the financial markets to fund itself.

Solving the dispute is also seen as key to Iceland's chances of joining the EU.

Iceland's three main banks collapsed within days of each other in October 2008.

The government compensated Icelandic savers, but overseas customers faced losing all of their money.

The issue sparked a diplomatic row between Iceland and the UK, and created uncertainty over Iceland's economic recovery.

Nearly 60 percent of people were against the plan

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Comments

  • 0

    Savers save in foreign banks at their own risk. If i was an icelander i would not pay back someone elses irresponsible decisions.Bankers and investors have so much to answer for yet the obsene wages and bonuses continue with our governments blessing. We should be focusing our attention on proper reform, not bashing small countries!

  • -1

    In market economy there are risks, and, sometimes shit happens.

    Up the Icelanders!

  • +1

    They shouldn't have to pay this money. I agree with the result of the vote. These smaller nations need looking after, not exploiting like this. Or are we becoming like the USA? Trying to gain control over our neighbours by crippling their economic future with debt repayment?

  • +1

    "We have a difficult financial position as a country and this money would help" Well guess what, Iceland doesn't have this kind of money to pay you! Many lawyers have said Iceland isn't responsible for this, it was a private bank and as a taxpayer I shouldn't have to take the blame for it! Just to let you know most Icelandic people hadn't heard of Icesave until they were supposed to pay it all.

  • +2

    I agree with the people of Iceland and we ,ordinary people, should do the same to the people who seem to be immune to their criminal activities with our money...the banks.
    Not a chance that it will ever happen here as our governments are only extensions of the banks and will do as they are told.