The government plans to split retail banking and formal banking

In an effort to protect taxpayers from banks going bust, the government’s Banking Reform Bill will ensure that banks ring-fence their retail services from their investment activities. This reduces the risk of the banks going bust and it makes sure that those who have deposited money in the banks are given priority over other creditors.

This bill, which will apply to the whole of the UK, was formally announced in the Queen’s Speech 2012. It is based on a recommendation from Sir John Vicker’s Independent Commission on Banking. Some of their other recommendations will be published June 14 to coincide with the Chancellor George Osborne’s speech to the City.

The speech is expected to include promises to promote stronger competition between lenders, by making it far easier for consumers to switch bank accounts. It will also formalise the ‘depositor preference’ rule that puts depositors at the front of the queue in the event that a bank fails.

The most recent banking bail out where public money was used to prop up the failing banking system cost £1.162 trillion. This figure was made up of cash, loans, share purchases and guarantees. Although this helped to stabilise the banking system reforms are needed to bring growth.

To clarify why the Government plans to split retail banking and formal banking, a treasury spokesman said: ‘These far-reaching reforms will help solve the dilemma of how Britain can be home to one of the world’s leading financial centres without exposing British taxpayers to the massive costs of those banks failing.’

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