Britain's biggest banks to be forced to separate retail banks from investment arms
Bank of England fails to back down on ring-fence rules despite pressure from banking lobby
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The City's biggest banks must ring-fence their retail operations from riskier investment banks Photo: Getty Images
9:35AM BST 15 Oct 2015
257 Comments
Britain's biggest banks will
have to run their retail banking operations as independent banks, almost
entirely separate from their investment banking and overseas
operations, as the Bank of England made it clear that there will be no relaxation of the incoming ring-fencing rules.
As a result, regulators hope the high street lenders will be able to
continue running the retail arms with no difficulties even if their
investment banking arms get into trouble.
Basic services such as payments and bank account access should be able to continue even if the parent group collapses.
The new rules will apply to all of the big banks
Those ring-fenced units
must hold bigger capital buffers to protect themselves against a
downturn, and have their own independent IT, human resources, processing
and risk teams.
However, in one minor
concession, the retail banks will be able to pay dividends to their
parents, as long as they tell the regulator first and show the payouts
will not harm their resilience and stability.
Those banks' retail units will face their own stress tests as well as those applied to their parent group, under which the Bank of England's Prudential Regulation Authority checks to see how the bank will cope with tough economic conditions.
From 2019, each bank's retail banking arm must treat its investment banking operations as if it is an entirely unrelated company. That means for risk purposes, as well as capital buffers and even the financial terms of transactions, the retail arm cannot give other parts of the banking group any favourable treatment.
George Osborne, the Chancellor, said in July the Government would not back down on ring-fence rules
Cross-selling is still allowed, as long as it is carried out on commercial terms and the ring-fenced bank would be able to survive without those deals in place.
However, the changes are not costless.
The ring-fenced bank will have to hold more capital, as once the rest of the group is split off, the unit's risks become more concentrated. In addition, the retail bank had to hold more capital against its exposures to other parts of the group.
That is expected to amount to as much as £3.3bn extra capital. Next year the Financial Policy Committee will decide how much extra capital the retail arms should hold to cover their risk to the financial system, which could add another 3pc to those units' capital requirements.
In addition, the operational separation of the banking units is expected to cost roughly £200m per bank as a one-off cost, plus around £120m per year.
Analysts said the changes also present serious administrative challenges for banks.
“Ring-fenced banks will have to become autonomous from the rest of their groups in a whole host of ways – from needing their own risk management resources, to re-engineering their relationships with financial market infrastructures (including the Bank of England itself), and disentangling the complex financial connections between different parts of the group. The requisite investments in systems, data capabilities and compliance architecture will be considerable," said Deloitte's Clifford Smout.
“There is a lot of detail to digest here, and industry faces a challenge to incorporate all this new information into revised – and ‘near final’ – implementation plans for the regulators in just three months.”
- Former Barclays chairman: Bank ring-fence is redundant and should be scrapped
- We have better things to do than implement the ring-fence, says HSBC
Those banks' retail units will face their own stress tests as well as those applied to their parent group, under which the Bank of England's Prudential Regulation Authority checks to see how the bank will cope with tough economic conditions.
From 2019, each bank's retail banking arm must treat its investment banking operations as if it is an entirely unrelated company. That means for risk purposes, as well as capital buffers and even the financial terms of transactions, the retail arm cannot give other parts of the banking group any favourable treatment.
George Osborne, the Chancellor, said in July the Government would not back down on ring-fence rulesCross-selling is still allowed, as long as it is carried out on commercial terms and the ring-fenced bank would be able to survive without those deals in place.
However, the changes are not costless.
The ring-fenced bank will have to hold more capital, as once the rest of the group is split off, the unit's risks become more concentrated. In addition, the retail bank had to hold more capital against its exposures to other parts of the group.
That is expected to amount to as much as £3.3bn extra capital. Next year the Financial Policy Committee will decide how much extra capital the retail arms should hold to cover their risk to the financial system, which could add another 3pc to those units' capital requirements.
In addition, the operational separation of the banking units is expected to cost roughly £200m per bank as a one-off cost, plus around £120m per year.
Analysts said the changes also present serious administrative challenges for banks.
“Ring-fenced banks will have to become autonomous from the rest of their groups in a whole host of ways – from needing their own risk management resources, to re-engineering their relationships with financial market infrastructures (including the Bank of England itself), and disentangling the complex financial connections between different parts of the group. The requisite investments in systems, data capabilities and compliance architecture will be considerable," said Deloitte's Clifford Smout.
“There is a lot of detail to digest here, and industry faces a challenge to incorporate all this new information into revised – and ‘near final’ – implementation plans for the regulators in just three months.”
