Earlier this year the Independent Commission on Banking, chaired by Sir John Vickers, laid out proposals on how to make the banking system less vulnerable to financial shocks. A highlight of its report in September was to put a barrier between the retail, deposit-taking side of a bank, and the supposedly riskier parts, such as investment banking and trading. The “ring-fenced” retail banking arms will have to carry higher capital to protect against risk. The ICB also suggested “living wills” for banks, setting out procedures to wind a bank up in an orderly fashion.

The ideas – widely expected to become law in some form following supportive remarks by the UK government – have drawn mixed reactions. One concern has been how these ideas will affect clients of private banks which are part of a large, integrated firm where investment banking sits next to a wealth management business. Examples of such firms are Credit Suisse, UBS, Citi, Barclays and JP Morgan.

The ring-fencing issue should put a private bank in the position of an "agent" acting for a client in relation to an investment bank, and should not pose a problem, Steve Smith, competition and regulatory strategy director at Lloyds Banking Group, told a conference organised by the Institute of Economic Affairs in London.

A more significant issue is for the mass market, as access to products such as fixed-rate mortgages could be adversely affected if the exact location of the “ring fence” is not correctly imposed, he said.

“We are broadly comfortable with the idea of the ring fence and think some of the definitions around it are sensible,” he said, although he warned that implementing the ICB’s ideas may prove more difficult than some in the industry think.

Some industry figures have argued that the underlying problem is how banks have become so big that policymakers are frightened to let them fail, even though controlled bankruptcy might encourage bankers to take more care in future. The top four UK banks – Barclays, HSBC, Lloyds and RBS – account for 77 per cent of market share. All four of these banks operate substantial wealth management businesses.

Andrew Lilico, director and principal at Europe Economics, a think tank, said policymakers had to confront the public with the reality that it was impossible, and undesirable, to completely shield depositors from losses in the event of a bank failure.

“To many people, there must be some clear solution which is that depositors are not exposed to any risk,” he said. Lilico pointed out that until the last three decades, deposit protection was unknown in the UK.

One suggestion that the ICB should have adopted, Lilico said, was the idea of embedding a traditional savings bank, with full protection, inside a retail bank to give peace of mind to those depositors who wanted it. Lilico said this idea has won the support of, among others, Mervyn King, governor of the Bank of England.

A number of changes to the banking regime in the UK have already been made, such as in the form of tougher capital requirements and improvements to liquidity, Angela Knight, chief executive at the British Bankers’ Association, told the same conference.

She stressed the importance of the UK in adopting measures that did not divert too significantly from what might be imposed in other jurisdictions to avoid the UK losing its competitive edge. “There are significant issues that will flow from that and that will have an influence on our economy,” she said.

One risk from trying to save all banks is making the financial system more fragile in the long run in the face of unexpected crises, said Professor Philip Booth, editorial director at the IEA.

He suggested the BoE should be given legal powers to take control of a distressed bank and wind it up in an orderly fashion.