The Chancellor is locked in last-ditch negotiations this weekend over plans for new powers to split up Britain’s leading banks if proposals to “ring-fence” retail and investment divisions are deemed not to have worked.
Ahead of a major speech on the issue on Monday, George Osborne is still negotiating with Vince Cable, the Business Secretary, on the exact detail of a reserve power the Government could use if banks were found to be abusing new regulations.
Figures close to the Chancellor said he would not back a “blanket power” to split all banks, but would allow it only for institutions found to have broken the rules.
The move will anger Britain’s leading banks, which say they are under so much regulatory pressure they are less able to support growth by lending and that a “reserve power” will increase doubt.
Asked if he backed “reserve powers” to split banks, one senior banking executive said: “Well, I didn’t support plans to do the ring fence, so it’s unlikely I’ll back new powers to make it even worse.”
The Chancellor has also demanded that the Royal Bank of Scotland (LSE: RBS.L - news) pays the expected £500m fine for Libor manipulation from bonuses , even if it means cutting payments for future years from people who had nothing to do with the manipulation scandal.
Mr Osborne has spoken to the chairman of UK Financial Investments Ltd, which looks after the Government’s 83pc stake in RBS, and made it clear that the taxpayer should not face any penalty because of the bank’s wrongdoing.
Sources close to the bank said it was difficult to see how RBS could afford to pay the amounts from bonuses as it had already cut payments.
“Fixing the Libor market is a symbol of all that went wrong with the banking system over the past 10 years. We are now putting those things right,” a Treasury source said, indicating that the sums could come from future bonuses.
“We all know there are Libor investigations ongoing into RBS in both the UK and US. Any UK fine will already go to the public, and the Chancellor has made it clear that on this occasion the bill for any US fine should be paid for by the bankers, and not the taxpayer.”
RBS executives are concerned that the Chancellor’s demands cannot be met. Sources indicated that even if this year’s bonuses were cut by 15-20pc the range suggested by outgoing markets chief, John Hourican it would not be enough. Executives said the bank can realistically only claw back amounts from the past two years.
Staff at RBS’s investment banking division were awarded £390m of bonuses in February 2012 for work done in 2011, vesting over the next three years. Some 15,900 work across the division.
RBS sources indicated that even after this week’s expected Libor fine, the bank faces further penalties relating to the European Commission’s probe on Libor, as well as RBS’s involvement in the swaps mis-selling scandal.
“To say fines related to conduct issues must all come out of the bonus pool is lunacy,” said a source close to RBS.
Sky News (NasdaqGS: NWS - news) reported that Mr Osborne wants to back plans first revealed in The Sunday Telegraph to maintain a reserve power to split up banks. The reserve power would be used if plans for a “ring fence” between retail and investment banking were deemed not to have worked or the banks were found to be flouting the rules.
The idea came from the Commission on Banking Standards, chaired by Andrew Tyrie MP, whose members include the Rt Rev Justin Welby, the new Archbishop of Canterbury, and Lord Lawson.