Britain is forcing big banks to set up a boundary around their high street operations to protect taxpayers from any problems in riskier investment banking operations. The so-called "ring-fenced bank" (RFB) needs to be in operation by 2019, and the Bank of England issued a consultation paper on its proposals last week.

"The proposed changes are credit negative for all bondholders of large UK banks because they remove some key obstacles to the effective resolution of these institutions and the bail-in of their bondholders," said Carlos Suarez Duarte, a senior analyst at ratings agency Moody’s.

Moody's said as activities outside the ring-fenced banks will be more volatile and riskier, the credit profiles of those businesses will be weaker.

The standalone credit profiles of the RFBs will benefit from being less risky businesses, but that will make them easier to resolve and enforce losses on creditors, Moody's said. The RFBs will also have a high amount of customer deposits, which bondholders rank junior to, which could increase the losses on bondholders in the event of a failure.

Moody's said the proposed rules had not clarified the treatment of existing creditors of the banks or addressed whether they will become creditors of the RFBs, the businesses outside the ring-fence, or of holding companies.

(Reporting by Steve Slater; Editing by Emelia Sithole-Matarise)