British banks face ring-fence between retail and investment arms

British banks are to be forced to ring-fence their retail and investment operations.The idea is to protect high street bank customers losing their savings if investment bankers suffer heavy losses, as they did during the financial crisis of 2008.The Chancellor of the Exchequer, George Osborne, is expected to announce the policy this evening during his annual Mansion House speech following recommendations made by Sir John Vickers, the former chief economist at the Bank of England.The banking industry is split over whether the proposed changes are a good idea. The UK's biggest bank, HSBC, has said separating investment and retail activities could be a good thing, while Stephen Hester, the Chief Executive of RBS has argued the reverse and claims it will lead to higher costs for consumers.Exactly how the so called "firewall" between investment and retail will work is not yet clear but some reports suggest the Chancellor will call for retail banking operations to have their own IT systems, offices and funding completely separate from other parts of the company. This, it is hoped, would ensure they could operate in the event of failure elsewhere.This evening's Mansion House speech is, according to the BBC, also likely to touch on the vexed issue of how much capital banks must keep in reserve to protect themselves in a crisis. It cites treasury sources as saying the figure could be as high as 10% of the value of the bank's risky assets. Some bankers would see this as a severe restriction on their freedom to act in the market-place. It is also expected that George Osborne will announce this evening how the government intends to deal with the disposal of Northern Rock, the former building society whose collapse signalled the beginning of the banking crisis in the UK.Reports suggest a "good bank" - made up of 70 Northern Rock branches and customers' savings accounts - will be sold to the private sector while the government will retain the so called "bad bank" containing the risky loans that were the cause of so many problems in 2008.News of the UK government's plans for the banking sector left bank stocks the worst performers in the Europe Stoxx 600 index in early trading.BS