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U.K. Still on Hook for Ring-Fenced Bank Bailouts, Moody’s Says

U.K. taxpayers and bank bondholders may still end up footing the bill the next time a lender is bailed out, even as the government prepares to toughen laws to make banks safer, according to Moody’s Investors Service.

While the U.K. banking system will benefit from plans to “ring-fence” lenders’ retail businesses, the proposals are negative for bondholders, Moody’s said. Debt holders of those units may be made subordinate to depositors, while those of non-ring-fenced businesses will lose the stability the retail activities bring, and both risk being impaired in a crisis, according to analysts Andrea Usai and Ross Abercromby.

The proposals to separate lenders’ retail and investment banking divisions, and to increase competition by opening up the payments system, are key elements of the Financial Services Bill due to come into effect next year. The U.K. is implementing the recommendations of the Independent Commission on Banking, which was set up after the 2008 financial crisis to outline the government’s options in limiting taxpayer losses in future banking collapses.

“We continue to believe that risk will remain owing to the interconnectedness of the banking system,” the London-based analysts wrote. “Even a bank without a large retail deposit base or significant role in the payments system can cause systemic effects.”

While measures to increase competition and ring-fence retail banking will benefit consumers, the Financial Services Bill may not prevent taxpayer losses, the Moody’s analysts said. Any loss of earnings resulting from the banks’ reduced market shares would also be “credit negative” for these lenders, they said.

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