British Banks Face Most Radical Overhaul In Decades

Britain is set to change its financial laws. Officials say it's an attempt to prevent taxpayers from ever again having to spend tens of billions of dollars to save banks from collapse. Among other things, banks would be required to set aside more money as a cushion against possible losses.

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Banks in Britain are facing their most radical overhaul in decades. The government there wants to protect taxpayers from a rerun of the 2008 financial crisis, when they had to pay billions to rescue broken institutions. NPR's Philip Reeves says there will now be big changes in the way that British banks operate.

PHILIP REEVES: More than three years on, the British are still grappling with the aftermath of the meltdown. Their economy's stagnant. Two and a half million of them are out of work. Some experts believe another recession's on the way, fueled by the crisis in the neighboring eurozone. Britain's coalition government's trying to figure out ways of making sure that banking failures can't cause such damage again. It set up an independent commission to review the way British banks operate. That panel, chaired by economist John Vickers, has now come up with proposals for structural change that Vickers says would make the banking system fundamentally more stable.

JOHN VICKERS: First, it's much less likely to cause, or to succumb, to financial crises and the huge costs which they bring. Second, it means a banking system which is self reliant so that the taxpayer is never again on the hook for losses that banks make.

REEVES: The reforms include ring-fencing the banks' everyday retail operations from their potentially riskier investment activities. Banks would also be required to set aside more money as a cushion against possible losses, and when borrowing, to make bondholders shoulder more risk. Britain's finance minister, George Osborne, is warmly welcoming the reforms, and says the government eventually plans to implement them in full. Addressing Parliament, Osborne blamed the previous Labour government for failing to figure out how to have successful banks that don't end up being bailed out by taxpayers. That question should have been settled a decade ago, says Osborne.

GEORGE OSBORNE: But it was not even asked. And that failure means this country is still paying the price for that failure.

PARLIAMENT MEMBERS: Here, here.

OSBORNE: Billions of pounds have been spent; hundreds of thousands of jobs have been lost as a result.

REEVES: The proposed overhaul is winning broad political support in Britain. Voters remain angry with the banks, especially over the huge bonuses some of their executives have been pocketing. Peter Tapsell, a veteran with the ruling Conservative Party, told Parliament he applauded Osborne for appointing the commission and...

PETER TAPSELL: For withstanding the intensive lobbying against it by the very same universal banks that very nearly destroyed the world economy.

REEVES: But Tapsell urged Osborne to move quickly with the reforms, saying he's worried they could be kicked into the long grass.

TAPSELL: I very much hope that we will proceed, as is promised, not only with legislation in this Parliament, but in implementing it as soon as possible and well before 2019, when the long grass may have grown into a forest.

REEVES: Two thousand and nineteen - that's the time frame for introducing these reforms. Analysts warn that in eight years much can change, including individual ministers and the government itself. And remember, says economist Chris Roebuck: Making Britain's banks safe is not just a question of re-writing the rule book.

CHRIS ROEBUCK: If we go back to the causes of the financial crisis initially, much of that was about bad leadership taking bad decisions. And in any environment, no matter how much you regulate, if you have got bad leaders, things are going to go wrong. So what we have to hope is that actually, the culture of the banks has changed so that the people at the top make sure that the people lower down stick to the rules.

REEVES: Philip Reeves, NPR News, London.

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