RINGFENCED banks will not be allowed to lend to other banks in future, the Treasury announced yesterday, as part of a drive to stop institutions becoming entangled.
The consultation on bank reforms sets out which activities will be allowed within the ringfenced bank – the part of the lender including basic retail services, which regulators want to keep afloat even if the rest of the bank fails.
Core banks will include retail deposits and small firms’ deposits, but bigger companies – with over £6.5m annual turnover or more than 50 staff – and high net worth individuals can choose where to keep their money.
These core banks will not allowed to be exposed to any non-ringfenced banks, ending the flow of funding from retail depositors to other parts of the financial system. They can also not lend to insurers, investment firms and securitisation businesses.
Ringfenced entities will also be limited in the type of derivatives they can offer, with only swap, future and forward contracts allowed, and only for currency, interest and commodity hedging purposes.
And the total risk arising from those derivatives will not be allowed to exceed 20 per cent of the bank’s total credit risk capital requirement.
The consultation will remain open until October.