Jacqui Hatfield, Partner and Head of the Financial Services Advisory Group at Reed Smith LLP comments on George Osborne's proposals to ring-fence the investment and retail arms of UK banks:
"It became clear earlier this year that either ‘ring-fencing' or a Volker-style prohibition would be put in place for UK banks.
"The ring-fencing solution is a better option than a Volker-style prohibition as banks will be able to mix retail and investment banking under the same group, albeit in different subsidiaries.
"Despite funding issues still needing to be ironed out so that banks can take advantage of economies of scale from having retail arms and investment banking arms, ring-fencing has its benefits. It will simplify the structures of banks which have historically been too complicated. It will assist banks in complying with the living will concepts, including plans for dealing with adverse scenarios or their own possible demise. Importantly, it will also assist the regulator in dealing with a bank in crisis.
"However, it is clear that the bank guarantee will only cover the retail side of the business and there is a danger that this could encourage the investment side to take unnecessary risks.
"I also query to what extent cross-contamination can be avoided if the investment side does take more risks and the banking group gets into difficulties - even if the retail side is ring-fenced."
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Notes to editors
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