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EUROPE'S DEBT CRISIS HAS CAUSED A number of ruptures in the once-mighty single market. Investors have pulled money out of hard-hit peripheral countries and fled to the bloc’s northern core; the European money market has fragmented along national lines, making it harder for banks in the periphery to fund themselves; and regulators are demanding that financial institutions hold larger capital buffers in each country.

Now the European Union is bracing for the rise of a new series of barriers ­— this time inside the region’s leading banks. An advisory group led by Finnish central bank governor Erkki Liikanen last month recommended that major banks be required to place their proprietary trading and market-making activities into separately managed and capitalized subsidiaries. The proposal aims to insulate the banks’ deposit-taking and lending operations from their riskier market activities and reduce the potential need for future bailouts like those many governments extended during the global financial crisis of 2008 and ’09.

The Liikanen report echoes the findings last year of the U.K.’s Independent Commission on Banking, with a twist. The U.K. panel, headed by Sir John Vickers, an economist and head of All Souls College, University of Oxford, recommended that British banks be required to ring fence their deposit-taking businesses in separate subsidiaries to protect them from the risks of investment banking. But however the fence is constructed — by walling off market activities or walling off retail banking — the practical effect is likely to be similar in terms of added costs and managerial complexity for Europe’s big universal banks, analysts say. But unlike the so-called Volcker rule in the U.S., which will ban banks from trading for themselves and investing heavily in private equity, the segmentation proposed by European regulators will allow banks to continue their full range of operations.

Yet for all its popularity in Europe, ring fencing is proving very difficult to implement. Liikanen’s proposal is only a few weeks old, and it’s not yet clear whether Michel Barnier, the EU commissioner for internal market and services, will introduce legislation to adopt it. The U.K. has embraced the concept for more than a year, but regulators and politicians are months away, at best, from adopting legislation that would put it into practice.

The Vickers commission studied the industry for a year before proposing its ring-fencing solution in September 2011. The government of Prime Minister David Cameron endorsed the commission report immediately, released a white paper in June outlining how it intended to adopt ring fencing and published draft legislation last month, but the bill is moving slowly through Parliament, and lawmakers and regulators are struggling to define essential features of the new regime. “I’m still not clear as to what ring fencing will actually mean,” says Ian Gordon, a banking analyst at Investec Securities in London. “There are more questions than answers at this stage.”