British finance minister George Osborne tonight announced a major overhaul of Britain's banks by approving a separation of their retail and investment businesses to help avoid another global financial crisis.
Osborne also unveiled the privatisation of Northern Rock, three years after it was nationalised to save it from collapse in the global financial crisis of 2008.
In a high-profile annual address to finance leaders in central London, Osborne backed the findings of the government-appointed Independent Commission on Banking (ICB) which earlier this year called for a 'ring-fencing' of retail businesses.
'Today I have told the Commission that the government endorses both these proposals in principle. We will make these changes to banking to protect taxpayers in the future,' he said.
Osborne said he had taken the decision bearing in mind a 'British dilemma'.
'As a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in our national economic interests,' he said. 'But we cannot afford to let it pose a risk to the stability and prosperity of the nation's entire economy,' he added.
After months of speculation and deliberation on Northern Rock, which was nationalised by the previous Labour government, Osborne said the coalition had to 'clear up the mess of the past'.
'I can announce tonight that on behalf of you the British taxpayer, I have decided to put Northern Rock up for sale,' he said, adding that they could 'at least get some of our money back'.
He did not set a price but UK media reports said the government planned to sell it to a single buyer for about £1 billion sterling, less than the £1.4 billion handed to the lender by the state.
Potential buyers for Northern Rock could include Virgin Money, the Coventry and Yorkshire building societies, investment groups NBNK and Olivant, and Tesco Bank.
Northern Rock plunged into crisis in mid-September 2007 when its exposure to the US-triggered credit crunch forced it to seek emergency assistance from the Bank of England, sparking the first run on a British bank in recent history.
To avert financial meltdown, the UK government government agreed in December 2007 to guarantee all customer deposits and then later nationalised the bank in February 2008 to prevent its collapse. The lender was broken up into two parts last year, forming a so-called 'good bank' that will be up for sale - and a 'bad bank' management company to run down the remaining toxic assets.
The ICB had said in an initial report in April that UK banks need to protect their retail operations from their investment banking activities and should set aside more capital to avoid future state bailouts.
The Commission is seeking to protect borrowers and savers in the event of another crisis and will publish its final report on September 12 when it will outline how exactly the so-called banking 'firewall' will work.
The practice of banks using money from their retail arms to fund investment operations was widely blamed as a major factor behind the global banking crisis.
The ICB report followed fierce criticism over so-called 'casino' banking - a term commonly used to describe the high risks taken by investment bankers in the run-up to the crisis.
The Commission also suggested that banks raise their core capital reserve levels above the international minimum of 7%, to provide a greater cushion against the risk of failure. The measure would mean that they would be able to lend only about 10 times what they hold in deposits, rather than the 14 times allowed under current international standards.
