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Will The Big Banks Be Broken Up?

On February 4, the government announced its long-awaited Banking Reform Bill in parliament. The chancellor, George Osborne, speaking at banking giant JP Morgan's offices in Bournemouth added that the big banks in the UK would be broken up if they did not ring-fence their investment business from their high street operations.

On February 4, the government announced its long-awaited Banking Reform Bill in parliament. The chancellor, George Osborne, speaking at banking giant JP Morgan's offices in Bournemouth added that the big banks in the UK would be broken up if they did not ring-fence their investment business from their high street operations. The investment banking arms of the major banks are much more risky than the everyday retail operations. During the banking collapse however, the two types of business could not be disentangled. In order to protect depositors' money in retail banking the government had to bail out the banks to the tune of £65 billion and it is this situation that the Banking Reform Bill seeks to prevent from happening again.

 
Mr Osborne stressed that the public remained angry with the banks and went on to say that taxpayers should never again have to bail them out. The chancellor also highlighted other aspects of the bill. It should now also become quicker and easier for individuals and small businesses to transfer money. Currently, banks can make large financial transactions instantly but consumers often have to wait for days for money to be transferred. The bill will also make it easier for customers to switch accounts between banks, a process that in future should take no longer than a week.
 
In his speech the chancellor also referred to the perceived corruption and greed in the banking sector, specifically mentioning the scandal of the banks' fixing of the Libor interest rates. He went on to criticise the investment banking sector of having a 'casino' mentality that, when it failed, had brought the entire economy to the brink of collapse. Mis-selling of payment protection insurance on loans and credit cards was another example of the banks' unacceptable behaviour. 
 
The chancellor's speech was welcomed by Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards, who called it 'a step in the right direction' but added that there was still much to do. Mr Tyrie warned though that banks 'could not be trusted' and that once public attention had moved on they would try to bend the rules on ring fencing. Chris Leslie, shadow Treasury minister, was also broadly in agreement with the bill but warned that "We must see fundamental cultural change in our banks." Perhaps unsurprisingly, chief executive of the British Bankers' Association, Anthony Browne, was less supportive. While acknowledging that banks had made 'massive mistakes,' he claimed that the bill was 'good politics but bad economics' and would cause reduced lending.

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