BRITAIN'S biggest nationalised banks might be broken up under a Conservative government, to limit fallout from future institutional failures, George Osborne, the shadow chancellor has said.
Bigger bankers took proportionately greater gambles and could need ever larger bail-outs, which meant size in itself was a risk, he claimed.
Institutions such as Royal Bank of Scotland and Lloyds Banking Group might be dismantled under a Tory go
vernment when it came to selling off the state's shareholding. In a speech on the Tory economic strategy beyond the credit crunch, Mr Osborne also hinted at a division between retail and investment banking within the same financial group.
"It is clear that size itself is a risk factor," he told a London audience. "Not only do large financial institutions do more damage when they get into trouble, but their very size and 'too-big-to-fail' status may encourage them to … take risks that smaller banks dare not take."
In a direct challenge to the monolithic Lloyds Banking Group, Mr Osborne said there needed to be enhanced competition between banks "to protect consumers".
He continued: "By dint of its substantial shareholdings, the government has a powerful influence over the future structure of the UK banking industry, whether it likes it or not. When the time comes to sell off those shareholdings, we need to think very carefully before simply selling them to the highest bidder.
"We should look at whether Britain in fact needs smaller banks. For it would be a bitter irony if we came out of this crisis with a banking system that was even more concentrated and even riskier than the one we had before it."
Mr Osborne also suggested that a Tory government might include housing costs when measuring inflation. Prime Minister Gordon Brown's decision to change the measure of inflation from the Retail Price Index – which includes housing costs – to the Consumers Price Index, which does not, kept the official inflation rate at artificially low levels, holding back interest rates and encouraging more borrowing.
"A change of government would provide a sensible opportunity to review, with the Governor of the Bank of England, what changes would be appropriate so that housing costs are properly reflected," Mr Osborne said.
He reasserted Tory support for market economies, saying it had become too fashionable to bash capitalism in the wake of the financial crisis. Market reforms in countries such as China and India had done more to help raise living standards than any government policy, he said.
"Abandoning that progress or turning our backs on open markets would be a tragedy; it would return hundreds of millions to dollar-a-day subsistence poverty."
Stephen Timms, the Treasury minister, said the Conservatives remained "isolated and on the wrong side of the argument" of how to tackle the credit crunch.
"Alongside countries across the world, we are partway through a huge boost for our economy, families and businesses – a boost opposed by the Tories, who still think we should do nothing to help people through these tough times. Labour will not repeat the Tories do-nothing mistakes of the past."
