Proposals to shore up Britain's banks will be finalized in a key government-sponsored report on Monday, which is set to outline tough measures that could hit banks' profit although the reforms could take years to implement.
The final report from the Independent Commission on Banking was expected to back protecting ordinary savers and customers by ring-fencing a bank's retail division from riskier investment banking and trading arms.
Britain set up the ICB last year after the global credit crisis saw the government having to fully nationalise Northern Rock and part-nationalise Royal Bank of Scotland and Lloyds . The government now has stakes of 83 percent and 41 percent in RBS and Lloyds respectively.
Finance minister George Osborne has already backed the idea of ring-fencing the retail operations of a bank deemed to be vital to the broader economy, and a Treasury source said Osborne was pleased with the ICB's final report.
"The Chancellor read the ICB report over the weekend while attending the G7 summit in Marseilles. He thinks it is a very good report and regards it as an important step in reforming our banks so that we do not repeat the terrible mistakes of the last few years," the source said.
There were expectations banks could be given years to implement the reforms after recent financial market turmoil and a deepening euro zone debt crisis raised fears over the impact of swifter change.
Britain's "Big Four" banks -- Barclays , HSBC , Lloyds and RBS -- have fought hard against excessively tough new regulation and were expected to continue lobbying after the ICB's report is out.
However, business secretary Vince Cable said Britain should move ahead quickly with the new banking reforms and ignore lobbying to delay legislation.
"Banks must be left under no illusion that reform is coming. The recession is not an excuse for postponing banking reform. Indeed our economic recovery depends on it," Cable wrote in the Mail on Sunday newspaper.
GOVERNMENT TENSIONS OVER BANK REFORM
Differing opinions over how to tackle the banks in the wake of the credit crisis have caused tension in the Conservative-led coalition government.
Cable, a Liberal Democrat -- the junior partners in government, has been alone in seeking a full split up of retail and investment banking operations into two new companies. Labour's opposition finance minister Ed Balls has said he would like a "tough but fair" ring-fencing mechanism.
The ring-fencing approach would get lenders to form separate subsidiaries for retail and investment banking operations while keeping the same parent holding company.
The reforms will likely hit banks' profit because of the implications for their funding costs, which could, in turn, make it harder for them to lend to businesses.
The ICB is still to define how the separation should occur: that is, how much retail capital and deposits the banks should be able to use to fund their investment banking arms.
The ICB, headed by Oxford University academic John Vickers, was also expected to confirm a request for banks to hold more capital -- targeting core Tier 1 capital of 10 percent of risk-weighted assets.
Analysts expected Barclays to face the biggest hit to its profit from the ICB's proposals.
Lloyds could be affected if the ICB reiterated a recommendation to sell more assets than it has already been told to do by regulators, although Lloyds's progress on the sale of some 630 branches could mean it might avoid this.
After the final report is issued, the government will choose what to implement into law, probably starting late this year or early in 2012.
However, banks could have years to bring in the reforms, perhaps until 2019 for full implementation, since the ongoing financial market turmoil has raised concerns over the impact of swifter change.
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