George Osborne: we will not backtrack on ring fence rules

The Chancellor said the split, which is due to be completed in 2019, was an “important step” towards making banks safer that should be allowed to “settle down” in legislation.

Mr Osborne was also forced to defend changes made to the bank levy in the Summer Budget, after MPs suggested the shake-up could reverse a move to “level the playing field” between established lenders and challenger banks, and constrain lending among mutuals and smaller institutions.

According to The Telegraph, Mr Osborne told MPs that he was not aware of any Treasury officials seeking to water down current ring-fence proposals. Banks have claimed that the proposals, which were initially recommended by Sir John Vickers in 2011, will push up costs for customers.

“Broadly speaking we should now let a lot of banking regulation settle down – I would include the ring fencing legislation in that,” he told the Treasury Select Committee (TSC) on Tuesday.

“The ringfencing of the banks is an important step that parliament has taken and it’s being implemented now to make sure that the person doing my job has a better set of options than [former Labour Chancellor] Alistair Darling had when he was told that the Royal Bank of Scotland was collapsing.

“And the report by John Vickers … gives the Chancellor options to try to protect the retail banking division.”

Mr Osborne has faced fierce criticism from challenger banks for replacing the original bank levy – which was imposed on any UK-based bank with liabilities of more than £20bn – with a lower one that is restricted to UK balance sheet liabilities from 2021 and partly offset by an 8pc corporation tax surcharge on all institutions that post profits of £25m or more.

The original levy hit around 30 banks, while the revamped model is estimated to affect around 200 institutions.

The Chancellor defended the changes, and insisted that he had “got the balance right when it comes to [bank] taxation”. He added that it would be difficult to tax banks and building societies differently.

“You have to tax banking institutions as banking institutions,” he said. “The regulatory regime makes a distinction … I think some mutuals are very large, and in size at least are similar to banks.”

Mr Osborne said that the Government remained committed to hold a “tell Sid”-style sale of shares in Lloyds Bank “within the financial year”.

Mark Carney, the Governor of the Bank of England, told MPs last week that regulators would “make sure” they implemented the ring-fence in a manner that ensured “the critical economic functions of that ring-fenced bank continue.

“What we are trying to do is to make the implementation of ring-fencing as complementary as the necessary implementation of ending too big to fail,” he said.

However, Martin Taylor, the former chief executive of Barclays and a member of the Bank’s Financial Policy Committee (FPC), said in May that the “increasingly shrill voices” calling for a softer stance from watchdogs were “wrong”.

The Treasury announced on Tuesday that it would bring forward a series of reforms designed to “improve the accountability and governance of the Bank”, including shrinking its court of directors and appointing another member to its Financial Policy Committee, which is in charge of financial stability.

He also said the Treasury could give more powers to the FPC to clamp down on the buy-to-let market within “months”.

It came hours after Mr Osborne ordered unprotected Whitehall departments to draw up plans for swingeing cuts over the next four years.

Mr Osborne also published a distributional analysis of how changes in the Budget, including welfare cuts, would affect the richest and poorest households.

The Treasury’s analysis showed the richest 20pc of households were still “making the greatest contribution to reducing the deficit, as a percentage of their income”. However, it also showed a substantial reduction in income for the poorest 20 per cent of households from welfare cuts. The decline was much steeper than the fall assumed in the March Budget.