Experts have warned that the recent banking stresses demonstrate the importance of the ringfencing regime as the government’s consultation comes to an end.
Treasury ministers are keen to push forward with changes to how banks are forced to separate their retail and commercial activities with, for instance, investment banking operations – reducing the number of firms subject to the rules by increasing the threshold at which the rules kick in.
The government has said it believes the resolution regime – which kicks in when a bank is set to fail – will become embedded and reduce the need for strict ring-fencing rules.
Anindya Ghosh Chowdhury, director at Mazars, argued that although there are benefits to reforming the ring-fencing regime, the timing was not right.
“The timing of this change is of concern as the alternate approach to safeguarding financial stability – resolution – is largely untested,” Chowdhury told City AM.
Resolution regimes were developed post-financial crisis to make it easier to deal with a collapsed bank without falling back on bailouts. Many suggest it performs the same role as ringfencing by ensuring banks are not ‘too big to fail.’
The government’s own proposals on ringfencing are based on the argument that the resolution regime has overtaken the ringfencing regime, meaning it can be reformed and removed.
However, as Chowdhury noted, over the past few months regulators have avoided using the resolution regime despite a number of bank collapses. “Three banks have failed in the recent past, and issues with the effectiveness of the implementation of resolution plans in each case is well known,” he said.
These concerns have previously been voiced by professor John Vickers, one of the architects of the ringfencing regime.
In March he told City AM that “recent events have shown that it (resolution regime) doesn’t necessarily work as advertised when push comes to shove.” Vickers argued that “the fundamental UK architecture of ring-fencing should remain the same.”
With stress in the banking sector continuing in the US, Chowdhury said “the impact of the phase-out at this time on market confidence is anyone’s guess.”
Ringfencing, which was introduced post-financial crisis, separates a bank’s investment banking division from its retail with the intention of protecting the core retail division from shocks originating elsewhere. It covers banks with more than £25bn of deposits.
The government’s consultation on changes to the ringfencing regime closed on Sunday. It proposes to lift the threshold at which ringfencing applies to £35bn.
Supporters of reform argue it will make the UK’s financial system more competitive. KPMG’s head of banking Peter Rothwell commented: “One of the key questions to be considered will relate to competitiveness – both in respect of the UK banking sector internationally, but also the impact domestically between large, ring-fenced entities and other domestic competition.”
Supporters of reform suggest the regime is expensive and prevents banks from growing or innovating. For example, there is some evidence that banks limit their growth to stay below the threshold.
Some also argue that it prevents funds from being used efficiently as they can be trapped within the ringfenced division.
Many also point out that a raft of new reforms to improve the safety of the financial system have been introduced since ringfencing was introduced, including tighter capital and liquidity rules.
“Some may argue that the objectives of ring fencing have been achieved through other prudential means,” Rothwell said.