The head of a commission looking into the potential break up of Britain's biggest banks on Saturday urged reforms to ensure that unsuccessful financial institutions "fail safely."
Financial risks — especially those taken by the investment banking operations of big banks — should not be borne by a "generous safety net" provided by taxpayers, said John Vickers, chairman of the Independent Commission on Banking. One way to reduce the danger of banks failing and protect the taxpayer would be to separate banks' retail and investment banking businesses, he said.
"Systemically important institutions now have an implicit state guarantee for risk-taking activities, particularly those related to and/ or inseparable from retail banking," he told a conference at the London Business School. "This distortion, which is also a distortion to competition with other institutions, should be neutralized or contained."
Although he did not elaborate on how exactly banks' operations could be "ring-fenced," Vickers' comments suggested that banks such as Barclays PLC and the Royal Bank of Scotland Group PLC could be forced to restructure.
The banking commission was appointed by the government last summer to consider bank reforms that would promote financial stability and competition. It is due to issue recommendations in September.