July 23 2014 Latest news:

Savers and taxpayers should never have to “take the pain” again when a bank fails, under plans to overhaul the country’s banking sector.

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But there are fears that reforms unveiled in a government white paper will make it even harder for banks to lend to recession-hit households and businesses.

The proposals include giving savers a higher ranking than bondholders and corporate creditors when it comes to recovering cash should a bank fail. They also involve ring-fencing high-street banks – or “retail banks” – that handle consumer and small business accounts and keeping them away from the “casino banking” investment-banking operations.

The white paper follows recommendations made by the Independent Commission on Banking (ICB).

“We’ve got to stop problems here in the City of London spilling on to our high streets and putting taxpayers’ money at risk,” chancellor George Osborne said.

But Mr Osborne made a concession to banks by widening the activities allowed within the ring-fenced retail operations.

In response, Sir John Vickers, who led the ICB, said: “We welcome that the ICB proposals have been accepted in large part, but urge the government to resist pressure to weaken their effectiveness.”

Richard Lloyd, executive director at consumer group Which?, said: “We welcome today’s banking reform white paper.

“Plans to ring-fence high-street banking from riskier investment banking is a major step towards restoring consumer confidence and transforming the culture of banking.

“Never again should consumers have to foot the bill for a banking bailout that last time cost every man, woman and child £2,000.”

But Kevin Mountford, head of banking at Moneysupermarket.com, said: “These proposals could come with a sting in the tail, as it may be retail banking customers that will end up footing the bill for these changes.

“A further problem for consumers is the fact that the providers’ investment arms are the parts of the business that generate the most profit. If banks cannot use this revenue to subsidise their retail businesses, we could expect to see the cost of consumer borrowing driven up, and this could even signal a move towards the end of free banking as we know it.

“There is no doubt that the cost of adopting these policies will mean the customer will likely pay more for their services.”

Anthony Thomson, chairman of Metro Bank, one of the newest players on the UK high-street, said it was important not to put too much faith in the proposals.

“We must bear in mind that the banking liquidity problems of four years ago weren’t a result of investment banking errors, but errors made by retail banks’ overreliance on wholesale funding,” he said.

“The banks borrowed huge amounts of money from the markets and once that source of liquidity dried up, their overreliance led to their demise.

“While ring-fencing will protect depositor’s money, it won’t stop another crisis by itself.”

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