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Does the UK government support splitting UK banks?

While Mervyn King's comments earlier in the week regarding a potential splitting of UK banks between risky and less risky operations received very short thrift from the UK government there is a feeling that forthcoming banking capital rules may well produce a similar scenario. Quite why the government and Mervyn King appear to be at so different ends of the spectrum is a mystery when evidently they may well have a similar goal in mind.

It is believed that tougher capital rules being brought in by the FSA (Financial Services Authority) and the Bank of England will in fact ensure that the more risky operations of the UK financial sector require significant capital over and above past levels. This may well see the less risky assets of well-known UK financial institutions separated in order to address the very different funding issues each operation attracts.

The government and the regulators will need to be very careful because over cautious capital rules may well impact on trading conditions and could actually reduce the size of the UK financial market significantly in the future. When you bear in mind that the UK financial sector is a prominent part of the UK economy this will be a very tough balancing act for the authorities.

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