UK financial regulation architects warn of scrapping ‘ringfencing’

Two architects of Britain’s post-crisis financial regulation have warned against the “reckless” abandonment of rules enforcing the separation of the retail and trading divisions of large banks, after an independent panel suggested replacing “ringfencing” with measures to ensure that Banks can certainly fail .

The Skeoch report, commissioned by the Treasury Department, said last week that the three-year-old ring-fencing regime designed to protect savers’ money from trade explosions should remain in place for the time being. But it also advocated the possible exclusion of some banks on the basis that they are “resolvable,” a term meaning they could fail with minimal public harm.

According to the report, measures to ensure bank resolvability should play a “more important role” than ring-fencing in the longer term, paving the way for the costly segregation of banking operations to be abandoned in favor of newer measures to protect taxpayers, such as the forced conversion of some bonds into equities , a process known as “bail-in”.

A task force from the UK Treasury and the Bank of England will now examine recommendations on the future of the regime for banks with deposits in excess of £25bn, a group which currently includes HSBC, Barclays, Lloyds, NatWest Group, Santander, Virgin Money and TSB belong to .

“If anyone in the world believes bail-in will work, it’s me,” said Sir Paul Tucker, a senior fellow at Harvard University who was deputy governor of the Bank of England from 2009 to 2013 and chaired the G20 group who designed the bail-in package. “But it would be reckless of the UK to put all its chips on it until the bail has worked in a massive live case, not just desktop practice, and even then I’d keep it just in case.” Ringfencing helps protect citizens from banking Armageddon.”

Mr John Vickers

Sir John Vickers led the 2011 report that produced ringfencing © Andrew Harrer/Bloomberg

Mr Paul Tucker

Sir Paul Tucker led the G20 group that drafted the bail-in package © Martha Stewart

Sir John Vickers, who directed the Report 2011 which spawned ringfencing, said the Skeoch report’s apparent treatment of “resolution” as an alternative to ringfencing was “puzzling”. Skeoch and his fellow experts suggested that a bank could be excluded from ringfencing if the Treasury Department and regulators felt they could be “fixed” with minimal impact and that integrating their commercial and retail operations would not compromise their resilience would.

“If a bank is big and complicated enough to be in the regime, it doesn’t seem plausible that it could be solved just like that. When the threshold is never reached [for exclusion]why do you have the power?” Vickers said, adding that the ring fencing improved banks’ resolvability since they were already neatly divided into different parts.

More generally, Vickers – who is now an economics professor at All Souls College, Oxford – said that minimizing the damage from bank failures “was just one of several reasons why we chose ring fencing in 2011”. Post-crisis regulators also wanted to decouple the freewheeling culture of retail trading desks, which they believed required a quieter approach, and introduce separate governance structures for companies that are inherently diverse.

It has been a costly and painful journey for the UK banking industry. HSBC issued alone £1.5 billion on separating the management, funding and operations of its UK retail bank from the rest of its business. Smaller banks, including Goldman Sachs’ Marcus, have argued that the regime effectively imposes a £25 billion cap on their deposits, as the cost of doing business skyrockets once that threshold is breached.

A spokesman for the Skeoch panel said, “The ringfencing regime is worth maintaining for now, but needs to be more adaptable to better serve customers and address future risks” and better aligned with the solution.

“Over time, the distance that is developing between the ring fencing and settlement regimes is likely to grow,” the spokesman said, adding that the settlement regime “now overtakes ring fencing by providing a more comprehensive solution” to ensure that banks can certainly fail.

The Treasury said: “We welcome the broad recommendations from the independent panel and will set up a task force with the Bank of England to assess the options recommended by the panel and will publish a government response later this year.” UK financial regulation architects warn of scrapping ‘ringfencing’

Adam Bradshaw

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