Business | Tue Nov 13, 2012 6:18pm GMT

RBS says ring-fence plan creates moral hazard risk

LONDON (Reuters) - Britain's plan to force banks to shield their retail banking operations from riskier activities could create a "moral hazard" from the expectation that lenders will be bailed out if they hit trouble, a top banker said.

"The language of ring fencing has huge risk of moral hazard," said Stephen Hester, chief executive of Royal Bank of Scotland (RBS.L). "You are giving a charter in everyone's minds for the next time there is a problem inside the ring fence, it (the bank) gets bailed out by one mechanism or another."

"I have a big worry about the moral hazard," he told lawmakers as part of an inquiry into banking standards and industry reforms, noting that in the past the "vast majority" of banking problems have been in retail banking.

(Reporting by Steve Slater and Matt Scuffham)