Ring-fence 'bad for bonds'

Plans to ring-fence the retail arms of banks from their riskier "casino" investment banking activities will be negative for investors holding their bonds, credit rating agency Moody's said today.

Chancellor George Osborne last night said he would back Sir John Vickers' Independent Commission on Banking's proposal that ring-fencing would allow High Street banks to survive even if their investment banks were allowed to fail. Moody's said that was a "credit negative" for the banks. Any part of a bank outside the ring-fence would be far less likely to receive government support in a crisis, Moody's said.

"We consider the principle of ring-fencing to be negative for existing bondholders if, as we expect, they are largely placed outside the ring-fenced entity," Moody's said, adding greater clarity was still needed on how exactly the proposals would work.

The ICB will publish its final recommendations in September and the banks are still lobbying it to try to prevent ring-fencing from becoming over-expensive and potentially pushing up customer charges. Moody's has already warned it could downgrade 14 British banks and building societies because regulators seem less willing to bail out banks in the future.

The greatest negative impact on creditors would be felt at Barclays, Royal Bank of Scotland and HSBC, Moody's added, as they have UK retail and wholesale banking within the same legal entity.