Should the UK relax bank ring-fencing rules?

The UK government could relax ring-fencing rules on banks to attempt to boost the sector and ignite a “big bang” in financial services.

The move is part of a “broader package of City reforms” proposed by City minister Andrew Griffith that will “boost competitiveness”, reported the Financial Times (FT). It is part of the government’s “long-promised liberalisation” of rules to bring “Big Bang 2.0” to the City of London and “take advantage of ‘Brexit freedoms’”, the paper said.

The ring-fencing rules were introduced in response to the 2008 global financial crisis, which resulted in the government bailing out failing banks with taxpayer money. The rules aim to shield consumer services in case other riskier parts of the bank fail, by requiring the investment arm and retail arm to be separate. Although it took until January 2019 to be fully implemented, it was one of the UK’s “boldest post-crisis reforms”, wrote Politico.

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Banks with “more than £25bn in deposits” are required to “formally separate” the investment and retail arms, said the FT, and the ring-fence would remain for the “biggest investment banks” including HSBC, Barclays, NatWest and Lloyds. Other banks with “limited trading operations”, including Santander UK, Virgin Money and TSB Bank, could benefit from relaxing the legislation, reducing the “associated costs and complexity of adhering to it”.

The end of ‘too big to fail’

The government has previously sponsored a review of the regulations and their application. The review, led by the former chief executive officer of Standard Life Aberdeen, Keith Skeoch, found that while the rules were “overly rigid” and needed to be “more adaptable, simpler”, it was recommended they remain in place.

Supporters of the regulations argue that removing them would “endanger financial stability” and a possible return of “too big to fail” banks and future tax payer bail-outs, said Politico. Skeoch said in his review that the regulations had succeeded in “improving financial stability” but the benefits would “diminish with time”.

If the ring-fence was fully removed it “would have to be replaced” with alternatives, Lord Andrew Tyrie, former cross-party banking commission chair, told the FT. He argued the sector has already made “a massive investment in the creation of the ring-fence” but did indicate it needed to “keep up with changes in the industry”.

‘Costs outweigh the benefits’

Those lobbying for the scrapping of the ring-fence argue it would give them a “competitive advantage internationally”, said Politico, as it would allow them “to use their retail deposits to make riskier bets on capital markets”.

UK Finance, which lobbies on behalf of some of the major banks, argued that ring-fencing is no longer required as banks hold “far more capital and liquidity”, reported Reuters. It said that the rules added “complexity and costs” and the “costs outweigh the benefits”.

Skeoch’s review said ring-fencing had the potential to “constrain the competitiveness of UK banks” but added the current impact was not “substantial”.

Politically, reversing the regulations could create a “backlash”, said Politico, saying that it has been “symbolic” as a “post-crisis remedy”.