Investment banking envoys are warning that the government must tread carefully if plans to set up an insolvency framework which would see crippled banks' retail deposits transferred to another bank are pushed through.

The plans are part of the Special Resolution Regime, which has been floated to stakeholders by the Treasury in conjuction with the Bank of England and the FSA, but the designs have been given a frosty reception, the FT reported.

The London Investment Banking Association said that the knock-on effects would have to be given serious consideration before any legislation was set in stone.

'This will be a major change to insolvency lawand practice in the UK It is vital that unintended consequences are avoided said Liba chairman Alan Yarrow.'

The British Bankers Association and the Association of British Insurers have also been high profile detractors of the plans.

'We have drawn attention to the care that will be needed if a special resolution regime is to be introduced for deposit-takers, to ensure that the implications for counterparties and for the markets more generally are properly taken into account, added Yarrow.

Further reading:

Risk lessons from the FSA