Britain's finance ministry, which is seeking to boost competition in the banking sector, on Thursday proposed legislation to ease rules that require banks to "ring-fence" their retail arms with a capital reserve.

The ministry set out a public consultation on its proposed secondary legislation to implement the recommendations made in a review conducted by a panel led by Keith Skeoch, a former investment fund boss.

The draft legislation proposes to increase the threshold at which ring-fencing applies to banks from 25 billion pounds ($30.31 billion) to 35 billion pounds.

"This announcement went beyond the panel's recommendations as the government considers that the appropriate deposit level has increased since it was first determined," the ministry said.

Britain introduced the ring-fencing rule in January 2019 following the costly taxpayer bail-outs of banks during the global financial crisis over a decade ago. It aims to ensure that deposits are safe even if riskier investment banking activities, outside the ring fence, lose value.

UK financial services minister Andrew Griffith said the planned changes would make the rule more adaptable and reduce the risk of unintended consequences.

"It will improve outcomes for banks and their customers, increase competition and improve the competitiveness of the UK banking sector," Griffith said.

"Several proposals are directly aimed at facilitating the provision of finance to UK small and medium enterprises, supporting their growth."

Banks would be exempt from the ring-fencing rules if their trading assets were less than 10% of their core capital buffer, unless they are part of a globally systemic bank.

Another change would allow ring-fenced banks to set up entities outside Britain to compete with international and domestic banking groups.

UK Finance, a banking industry body, said raising the threshold and allowing ring-fenced banks to open operations abroad will enhance customer choice and improve competition.

"Alongside this we continue to urge the government to review the long-term need for the ring-fencing regime, recognising the significant changes to bank resolvability since the regime was first introduced in 2019," UK Finance said in a statement.

The government intends to put forward secondary legislation for implementing the reforms in early 2024 with the changes coming into effect as soon as they clear parliament.

Separately on Thursday, the Bank of England published a consultation paper on proposals for a rule that would require a ring-fenced bank to ensure that any branch or subsidiary outside Britain "does not present a material risk to the provision of core services in the UK". ($1 = 0.8247 pounds) (Reporting by Huw Jones Editing by William Schomberg and Barbara Lewis)