A wide ring fence for retail banks

Some banks will be worse-hit than others by the ring-fencing of retail banking

There is no doubt that the Independent Commission on Banking will recommend that a ring fence or firewall should be put around retail banking operations, or the parts of big banks that look after our savings, make loans and move money around.

But that still leaves huge and economically important uncertainties. Or to put it another way, what matters - for the banks, for the implicit risks for taxpayers created by the structure of our banking industry and for the future prosperity of the UK - is the detail of how the new ring fence will be defined and implemented.

The scope of retail banking has to be ordained; whether, for example, it will include looking after the money of bigger businesses.

Also relevant is whether there will be an absolute prohibition on money moving between retail banks and investment banks when they are part of a so-called universal bank, like Barclays and Royal Bank of Scotland.

Finally, there is the issue of how long the Treasury will wait before announcing how much of the Commission's recommendations it will implement.

For what it is worth, I expect retail banking to be defined broadly, to include much conventional banking for businesses of all sizes (see my earlier post for more on this).

That would therefore force greater upheaval and reorganisation on Barclays and Royal Bank of Scotland, than on Lloyds, Santander and HSBC, because most of what Lloyds, Santander and HSBC currently do would be defined as retail banking under the commission's definition, and therefore they would see less of their respective operations hived off and taken outside their respective ring fences.

Second, it is likely that some cash and capital will be able to flow between a ring-fenced retail bank and an investment bank owned by a single universal bank, such as Barclays or Royal Bank of Scotland, so long as high minimum levels of cash and capital are maintained within the ring-fenced retail bank.

Finally, the Treasury is likely to pronounce definitively on how and when it will implement the ring fences by the end of the year, although the chancellor has already made clear that he supports this form of breaking-up our big banks as a matter of principle.