Knowledge Base — Bank Ring-Fencing

The Bank of England has published new plans to carve up the big banks. Sir John Vickers proposed the ring-fencing rules in 2011, and they are at last starting to take shape. Regulators want to split up retail banks - the services you would get in a branch, online or that a small business would use - from the investment banking and global operations of the giant banks.

The idea is that the essential parts of the business will become safer, making it less likely that normal people will be affected by a failure in the riskier parts, such as investment banking. Even if the bank does crash, the new rules should make it easier for the Bank of England to let investment banking operations collapse, but keep the retail bank running. The ring-fenced banks have been told to make sure they are not too reliant on their investment bank for revenues, and to have their own separate legal, HR and risk operations.

In theory, it means the government will never have to bail out a lender with a big investment bank like Royal Bank of Scotland ever again - but of course the real test will come at a time when financial markets are panicking.

It will not be cheap to implement. A whole array of changes to the capital regime are on the way which could mean the banking sector has to put aside tens of billions of pounds more into capital buffers, which could limit the amount they lend out to ordinary consumers and businesses. In addition, big banks will have to spend an estimated £200m each to implement the reforms, then £120m per year sustaining the extra staff in areas like IT, HR and risk. As always, that is likely to be passed on to customers.