Vickers Banking Commission report to back 'firewalls'
An interim report from the Banking Commission due on Monday will not support the total break-up of Britain's biggest banks, the BBC understands.
Instead it will favour ring-fencing their risky investment banking operations, so they do not jeopardise the savings of ordinary depositors.
The move will still cause anger at big banks like Barclays, according to BBC business editor Robert Peston.
It means their investment banking units will find it more expensive to borrow.
"I understand that the Commission will recommend that within megabanks like Barclays, HSBC, or Royal Bank of Scotland, new legal barriers - or 'firewalls' - should be constructed," our correspondent said.
"So that if a crisis occurs in the investment bank it can't hurt our savings in the retail bank."
Danny Alexander, Chief Secretary to the Treasury, declined to comment on the report's details ahead of official publication.
But he told the BBC's Andrew Marr programme on Sunday that the government would put the interests of taxpayers' ahead of the interests of banks when considering a bank restructuring.
"The government will take its obligations to taxpayers first. It is in the interests of taxpayers that will be uppermost in our mind in responding to this report, in taking this issue forward, not the interests of the banks.
"We set up this commission because we have a serious problem which has caused enormous damage to our economy. These banks' balance sheets are 5 times the size of the British economy. We have to act on that and we certainly intend to," Mr Alexander said.
Universal riskThe Commission of five economists and bankers, chaired by former Bank of England chief economist John Vickers, was tasked with considering a full-scale break-up of banks - something Liberal Democrats had called for in their election manifesto.
The concern is that "universal" banks such as Barclays, which combine ordinary retail banking with investment banking, benefit from an unfair government guarantee.
Markets believe the government would never allow a big retail bank to go bust, because of the resulting losses to depositors and the disruption to the payments system.
But this guarantee means that the universal banks can borrow more cheaply, and use that money to fund their highly profitable, but more risky, investment banking businesses.
The new 'firewall' arrangement is intended to eliminate the possibility of losses at the investment banks being borne by the public purse.
Rating downgradesIt is expected that the Commission will recommend requiring the banks to put their investment banking operations into a separate subsidiary company that they own.
The subsidiary would have its own capital, which could be used by it to absorb losses, but which would be allowed to go bust if it became insolvent.
Barclays' chief executive, Bob Diamond, was bitterly opposed to the move in evidence he gave to the Treasury Select Committee in January.
It would force the banks to raise more capital for their investment banks, something the banks see as expensive and painful.
And markets are likely to see the ring-fenced investment banks as riskier credits, making it more expensive for them to borrow and undercutting their profits.
Rating agencies will be looking carefully at the report to understand how it affects the chance of banks being rescued by the government in future financial crises.
One agency, Moody's, said on Thursday that it will review ratings for 19 UK banks this year in light of the tougher regulatory environment, with many likely to face large downgrades.
The ring-fencing may mean that rating agencies give investment banks separate - and lower - credit ratings than their parent banks.
Lehman BrothersHowever, critics may question whether the move will achieve its intended purpose.
It is unclear how strictly a retail bank would be restricted from supporting its investment bank - for instance through loans, guarantees or capital injections during a financial crisis.
Moreover, some may query whether the government itself would refuse to rescue a big investment bank during a financial crisis.
Former US Treasury Secretary Hank Paulson was heavily criticised for allowing the investment bank Lehman Brothers to fail, sparking the global financial crisis in September 2008.
