The British government intends to force banks to insulate their retail operations from their more volatile investment banking, a Treasury source confirmed Wednesday.
The policy is intended to help prevent a repeat of the financial crisis of 2008 and resolve the problem of banks which become too big to be allowed to fail.
Treasury chief George Osborne will announce the decision Wednesday evening in a speech to financial executives, the source said on condition of anonymity.
Shares in Britain's big banks fell Wednesday, with Barclays down 1.8 percent, while bailed-out Royal Bank of Scotland and Lloyds Banking Group fell 1.4 percent and 0.7 percent, respectively. HSBC was also down 0.7 percent.
The Independent Commission on Banking, chaired by Sir John Vickers, a former chief economist of the Bank of England, has recommended a clear separation of retail and investment banking; details of the commission's proposal are expected in a final report on Sept. 12. In it, the panel is expected to recommend how retail operations are separated into a distinct subsidiary within a larger banking group.
In his interim report in April, Vickers said that "ring-fencing" retail banking would make it easier and less costly to sort out a crisis. This would allow retail operations including current accounts, consumer loans and mortgages to continue, while the investment side could be allowed to fail.
Vickers said the split, along with higher capital requirements on the retail side, "could curtail taxpayer exposure and thereby sharpen commercial disciplines on risk taking."
Not everyone is so keen about the proposals.
Stephen Hester, chief executive of Royal Bank of Scotland, recently told a parliamentary committee that ring-fending could backfire by creating "a protected beast that the government would support," inadvertently encouraging excessive risk-taking on the retail side.
Hester added that the removal of implicit government support would also make other parts of the bank more exposed.
RBS and Barclays favor a limited ring-fencing which only covers retail deposits, while HSBC Chairman Douglas Flint recommended that the retail side should include some corporate deposits and loans.
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