LONDON — The British government announced its proposals for reform of the UK banking industry Thursday, aiming to prevent a repeat of the crisis which forced taxpayers to bail out two major banks in 2008.

The government said it will legislate to isolate retail banking from riskier investment banking activity. That step was a key recommendation of the Independent Commission on Banking to protect taxpayers from bearing the cost of bank failures and to protect the savings of ordinary depositors.
Business Secretary Vince Cable said the proposals would lead to a situation where “the public do not subsidize banks and banks are allowed to fail without a threat to the system at large.”

The Treasury said individual depositors would be compensated before bondholders and corporate creditors in the event of a bank failure. The government already guarantees deposits up to 85,000 pounds ($132,000).
This provision, the government’s paper said, “should sharpen the incentives for other senior unsecured creditors to exert discipline on banks’ behavior.”

Bankers have warned that putting depositors ahead of bondholders and creditors could force up the cost of loans to business and consumers if bondholders demand higher returns on their investments. —AP