RBS chief warns of 'moral hazard' in ringfencing retail banks

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Royal Bank of Scotland's chief executive, Stephen Hester, last night warned members of the Parliamentary Commission into Banking Standards that plans to force banks to "ringfence" retail banking could create a "moral hazard" as a result of them expecting a bailout.

Mr Hester said bankers could assume that ringfenced "safe" banks would be bailed out if things went awry. He said: "The language of ringfencing has huge risk of moral hazard. You are giving a charter in everyone's minds for the next time there is a problem inside the ringfence, it [the bank] gets bailed out by one mechanism or another. I have a big worry about the moral hazard."

Mr Hester argued that most of the problems with banks had been "in retail banking".

He was appearing alongside Peter Sands, chief executive of Standard Chartered, and Antonto Horta-Osorio, boss of Lloyds.

At an earlier session featuring so-called "challenger" banks, Jayne-Anne Gadhia, who previously worked at RBS, told the Commission that the industry had been well aware of problems with payment protection insurance, now the subject of multibillion compensation claims. But she said no bank wanted to be "first mover" by withdrawing it.