Softer European ring-fence rules could hurt UK banks

European banking watchdogs could allow banks to evade tough rules designed to ensure that lending operations are ring fenced from “casino” investment banking.

But they are set to bring in their own version of America’s ban on banks placing bets in the market with their own money — the so-called Volcker Rule.

The new regulation would hit 30 of the continent’s biggest banks, including the big players in the UK.

Britain has already demanded a ring fence around banks’ retail lending and deposit taking to protect them from risky investment banking.

A softer line from the European Commission would therefore be unlikely to help them. Britain has also been in the vanguard of forcing banks to hold more capital and reduce leverage

In theory, lighter rules from Europe could therefore disadvantage British banks against EU rivals.

But banking industry sources said it was early days yet. “Our problem is we still don’t know how this is all going to turn out,” one said.

“But the issue that Britain faces is that in gold plating all these new rules, a business in Newcastle wanting to borrow money to export is going to find it more expensive to do it than one in Pittsburgh or many other places, because we will have to charge them more.”

Brussels’ attempts to shake up banking regulation — which are being led by EU financial services chief Michel Barnier — are still being finalised and the plans, seen by the Financial Times, are still only at the “proposal” stage.

The proposal stems from the 2012 Liikanen report into the structure of banks. It follows reforms pursued in France and Germany which allow national watchdogs to declare whether a particular type of trading poses a systemic risk and should therefore be isolated and placed in a separately capitalised entity.

It would also allow Britain’s ring fence to be subject to EU approval.