Well, at last tonight we are to hear what Osborne has been agitating for so long - a real change of terms for the UK clearing banks.
With a proposed split into subsidiarised retail and non-retail businesses. The devil is in the detail thougth and it will be interesting to see where SME loans etc get parked - at the moment it seems all Non-Retail business is fair game. This makes sense to barclays where for a while now barclays Capital has been absorbing the UK Corporate bank. After all, you may as well make all the non retail banking high risk if you have to split the company anyway.
There are three downsides to the proposed model:
1 - it is not an international agreement, and it needs to be. The UK is no doubt hoping others will follow in its footsteps, but maybe HSBC etc will tire of the Regulatory change and upsticks. Even trying for an international agreement was beyond the wit of our politicians
2 - By saying 'Casino or Non Casino' you push the banks into taking more risks on the Casino side to make up for lost profits on the retail side. Great, we have a higher risk system and likely it will be more leveraged to with the removal of customer deposits. Worse for some of the banks, the capital needed to be held will be so much higher that they will be forced to take high risk loans on to try and generate some returns.
3 - Retail banking was not that profitable anyway, so now these banks will have to do something to help offset the extra capital requirements and regulatory burdens - there is only one sucker who is going to pay for this.
Overall, we will have a safer banking sector, but it will come with both more (albeit non-systemic) risks and higher costs. As ever, a great example of Government in action.