By Huw Jones
LONDON, June 25 (Reuters) - Raising Glass Steagall from the dead is not on the cards for Europe's banks but regulatory moves will effectively revive the Depression era law and carve up operations, experts said on Thursday.
The Glass-Steagall Act was a U.S. federal law adopted in 1933 that set up legal barriers between commercial and investment banking in response to the stock market crash.
It was swept aside in 1999, permitting companies to mix banking with other activities, a step some policymakers blame for helping to sow the seeds of the credit crunch.
Britain unveils plans to tighten the leash on banks next week to make the sector safer for investors and apply lessons from the credit crunch.
It will include the ringfencing of risky banking activities but stop short of the legal separation or dismantling of banks.
"The Chancellor has been clear that we will not be introducing a UK version of Glass-Steagall or a cap on the size of banks -- reasonably 'narrow' and relatively small banks have shown an ability to threaten the system," a source at Britain's finance ministry said.
"What I said is not a reasonable way forward was achieving a hard and fast legal divide between narrow banking and investment banking," Adair Turner, chairman of Britain's Financial Services Authority, said this week.
Still, lawyers, financial experts and bank officials say a Glass Steagall set up will emerge in all but name as regulators use other means and avoid a potential legal quagmire of a law.
Britain is set to bump up capital requirements on a bank's trading book and insist on topping up capital in good times and new mandatory liquidity buffers, making banks think twice about the size and profitability of riskier business lines.
"It would divide a bank between trading and ordinary retail banking activities and at some point the board may decide what's the point," said Graham Bishop, a former banker and now an expert on EU financial law.
"What I can see happening is that capital structures will differentiate between different types of operations. You could almost finish up with a holding company," Bishop said.
Legal experts say Britain's ringfencing plans may not work.
"The proposal is bizarre. The one thing that we have learned from the recent past is that when one part of a financial group fails, the resulting collapse of confidence means that the rest also fails," said Simon Gleeson, a partner at Clifford Chance.
"Glass Steagall is theoretically defensible although practically unworkable - this proposal may be both indefensible and unworkable," Gleeson said.
Britain won't be alone as the rest of Europe and United States are poised to take similar action.
The Basel Committee on Banking Supervision is reviewing its globally agreed Basel II bank capital framework. It is likely to propose increasing capital on trading books with global ramifications, making it harder for cross-border banks to avoid.
Assets parked on a trading book attract lower mandatory capital charges than if the same assets were on the bank book.
Financial lawyers say if Basel recommends higher capital charges on assets on a trading book than on the bank book, it could lead to splitting up firms.
The EU is set to propose a reform of its bank capital rules later this year to include higher capital on trading books.
Balkanisation may come from another source as well -- the EU's executive European Commission as scores of banks have received government cash and must restructure in return.
"I don't rule out at all that the Commission may suggest remedies for excess concentrations that may break up some of these entities," Bishop said.
An international bank official said extra capital charges would still be better than a full blown Glass Steagall law.
"In a sense you do have a ring fence around each part of the business, but at the same time you still have some synergy between them by having access to funds held in deposits," the expert said.
"It will also be interesting whether the Basel Committee reaches a consensus on trading book capital," he added.
(Additional reporting by Sumeet Desai; Editing by Ron Askew)