UK bank reforms: hedges and fences Cutting banks some slack is not always wise, but the UK government has taken a chance. Its Independent Commission on Banking said nine months ago that banks should ringfence their retail operations from their investment banking arms. The Treasury broadly accepted that. But having had its ear bent by bankers, it has wisely softened its stance. In a white paper on Thursday, it proposed letting retail banks include certain investment banking-style activities within the ringfence. These include hedges to shield business clients from currency and interest rate fluctuations. That is logical and removes a pro-cyclical wrinkle that would hurt small businesses. Above all, the Treasury has understood that personal and business banking should sit inside the fence. Although the proposals should make bank recovery or resolution easier, there is no guarantee that they will work. The Treasury's concession on the ringfence is, however, balanced with tighter control of the derivatives banks use to hedge their own balance sheets. Just as well: the recent $2bn-plus loss by JPMorgan's chief investment office using its "excess deposits" is an example of the dynamite that can be ringfenced. The Treasury's hedging tweak will be of greatest benefit to Lloyds Banking Group and Santander UK, which have no investment banks but need in-house treasury operations. Otherwise, the story is unchanging: UK banks face an onslaught of often parochial regulation in a few years. While turning banks into fortresses, the upper core tier one capital hurdle of 17 per cent could so hamstring them as to hand business to banks outside the UK. There is little incentive to invest in retail banking. And ultimately, the £7bn cost of the reforms will be paid by bank customers. Too bad. That's a fraction of the UK's estimated £140bn bill for the 2007-2009 crisis.