The Treasury has confirmed its plans to reform the banking ring-fencing regime with hopes that the new regulations will go live in the first half of next year.
Reforms to the ring-fencing regime were announced as part of the government’s Edinburgh Reforms, a set of policies which seek to “unlock investment and turbocharge growth”.
City minister Andrew Griffith said the near-term reforms confirmed today represent “an important milestone in supporting the necessary evolution of the ring-fencing regime, more than four years after the regime came into effect”.
“The modified ring-fencing regime will be more adaptable, simpler and better placed to serve banks’ customers, by reducing the rigidity of the existing regime and addressing unintended consequences,” he continued.
Ring-fencing was introduced in 2019. The regulation separates a bank’s retail arm from its more risky investment banking operations in an attempt to protect retail deposits from risks emanating from elsewhere.
Announced at the end of last year, the proposals will lift the threshold at which ring-fencing applies from £25bn to £35bn. The government said that this reflects changes in the regulatory landscape — such as the resolution regime — and will “not materially increase financial stability risks”.
Resolution regimes were developed after the global financial crisis in order to make it easier to deal with a collapsed bank without resorting to bailouts. Many suggest it performs the same role as ring-fencing by ensuring banks are not ‘too big to fail’.
The government also proposed that banks without big investment banking operations will also be taken out of the regime, removing a “barrier to growth” for small banks.
Nala Worsfold, financial and risk policy principal at UK Finance, which represents the banks, said the proposals “will all enhance customer choice and improve competition”.
She urged 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”.
Lee Doyle, partner at Ashurst, suggested the confidence reflects the “confidence” that regulators have in big banks after recent crises, like the collapse of Silicon Valley Bank.
“The spectre of the global financial crisis and the frightening loss of liquidity has been removed and the confidence this has brought is enabling regulators to look at competition and growth opportunities in a more progressive manner,” Doyle said.
Alongside the reforms which previously been announced, the Treasury announced plans to allow ring-fenced banks to make direct minority equity investments in UK small and medium enterprises as well as invest in funds which invest in SMEs.
The consultation period for the reforms closes on 26 November. The government intends to put legislation before parliament in early 2024.
The Prudential Regulation Authority also announced proposed changes to the Solvency II regime, another key aspect of the Edinburgh Reforms.