8:07 a.m. | Updated
Proposed legislation to protect Britain’s financial services sector from future crises does not go far enough and may fail to stop banks from engaging in risky trading, British lawmakers warned in a report on Monday.
The warning comes as Parliament debates the new laws, which outline how firms could be split up if they do not separate their investment banking units from their retail banking operations.
The creation of a so-called ring fence between the banks’ businesses is an attempt to shield consumers from an implosion of trading activity and other risky behavior that led to several big banks being bailed out by British taxpayers during the financial crisis.
In the wake of the multibillion-pound handouts to British banks and a series of scandals like the manipulation of benchmark interest rates that have rocked London’s position as a global financial center, Prime Minster David Cameron created a parliamentary commission last year to review standards in the British banking industry.
In the report published on Monday, British politicians said the government had failed to adopt several proposals from the commission intended to protect local firms.
The recommendations include a regular independent review to check that banks are maintaining a separation between their risky trading activity and retail deposits.
The commission also suggested that firms’ overall leverage ratio, which measures the amount of risk banks undertake, should be higher than current international standards, and that local regulators should have greater powers to separate firms if they fail to maintain a division between the different business units.
“The government rejected a number of important recommendations,” Andrew Tyrie, a Conservative Party politician who is chairman of the parliamentary commission on banking standards, said in a statement. “There remains much more work to be done to improve the bill.”
Vincent Kessler/ReutersGeorge Osborne, Britain’s chancellor of the Exchequer.The report is the second time that the commission has officially weighed in on the British government’s attempts to improve how banks are regulated.
Last year, local politicians also demanded that British authorities should have the explicit power to split up banks completely.
In response to the proposal, George Osborne, the chancellor of the Exchequer, agreed last month to allow British regulators to forcibly separate firms that did not maintain a clear division between their retail and investment banking units.
As part of its lengthy investigation into British banking standards, local lawmakers have called many senior executives, including the chief executives of Britain’s major financial institutions, to give evidence.
In often tense testimony, bankers have been questioned about wrongdoing connected with the investigation into the manipulation of global benchmark rates like the London interbank offered rate, or Libor.
The Royal Bank of Scotland and Barclays already have agreed to large fines with American and British regulators over their roles in the scandal. Other British firms and international banks like Citigroup remain under investigation.
As part of efforts to revamp the country’s banking industry, British politicians are pushing through legislation that is aimed at protecting local consumers from potential future financial crises.
The new laws, according to the British parliamentary commission report published on Monday, “represent not the beginning of the end for the necessary reform process, but the end of the beginning.”