The bosses of 4 of Britain’s largest banks are secretly urging the chancellor to ditch probably the most vital regulatory change imposed after the 2008 monetary disaster, warning her that its continued imposition is inhibiting UK financial progress.
The CEOs’ letter represents an unprecedented intervention by many of the UK’s main lenders to abolish a reform which value them billions of kilos to implement and which was designed to make the banking system safer by separating teams’ excessive road retail operations from their riskier wholesale and funding banking actions.
Their request to Rachel Reeves, the chancellor, to desert ring-fencing 15 years after it was conceived will likely be seen as a direct problem to the federal government to take drastic motion to assist the financial system throughout a interval when it’s forcing financial regulators to scrap purple tape.
It can, nevertheless, ignite controversy amongst those that consider that ditching the UK’s most radical post-crisis reform dangers exacerbating the results of any future banking trade meltdown.
Of their letter to the chancellor, the quartet of financial institution chiefs advised Ms Reeves that: “With global economic headwinds, it is crucial that, in support of its Industrial Strategy, the government’s Financial Services Growth and Competitiveness Strategy removes unnecessary constraints on the ability of UK banks to support businesses across the economy and sends the clearest possible signal to investors in the UK of your commitment to reform.
“Whereas we welcomed the current technical changes to the ring-fencing regime, we consider it’s now crucial to go additional.
“Removing the ring-fencing regime is, we believe, among the most significant steps the government could take to ensure the prudential framework maximises the banking sector’s ability to support UK businesses and promote economic growth.”
Work on the letter is alleged to have been led by HSBC, whose new chief government, Georges Elhedery, is among the many signatories.
His counterparts at Lloyds, Charlie Nunn; NatWest’s Paul Thwaite; and Mike Regnier, who runs Santander UK, additionally signed it.
Whereas Mr Thwaite specifically has been public in questioning the continued want for ring-fencing, the letter – despatched on Tuesday – is the primary time that such a collective argument has been put so forcefully.
The one notable absentee from the signatories is CS Venkatakrishnan, the Barclays chief government, though he has publicly mentioned prior to now that ring-fencing shouldn’t be a significant monetary headache for his financial institution.
Different trade executives have expressed scepticism about that stance provided that ring-fencing’s origination was largely considered as being an try to resolve the conundrum posed by Barclays’ huge funding banking operations.
The introduction of ring-fencing compelled UK-based lenders with a deposit base of at the very least £25bn to segregate their retail and funding banking arms, supposedly making them simpler to handle within the occasion that one a part of the enterprise confronted insolvency.
Banks spent billions of kilos designing and organising their ring-fenced entities, with separate boards of administrators appointed to every division.
Extra lately, the Treasury has moved to extend the deposit threshold from £25bn to £35bn, amid strain from a variety of faster-growing banks.
Sam Woods, the present chief government of the principle banking regulator, the Prudential Regulation Authority, was concerned in formulating proposals revealed by the Sir John Vickers-led Impartial Fee on Banking in 2011.
Laws to ascertain ring-fencing was handed within the Monetary Providers Reform (Banking) Act 2013, and the regime got here into impact in 2019.
Along with ring-fencing, banks have been compelled to considerably improve the quantity and high quality of capital they held as a danger buffer, whereas they have been additionally instructed to create so-called ‘dwelling wills’ within the occasion that they bumped into monetary bother.
The chancellor has repeatedly spoken of the necessity to regulate for progress quite than danger – a phrase the 4 banks hope will now persuade her to desert ring-fencing.
Britain is the one main financial system to have adopted such an strategy to regulating its banking trade – a reality which the 4 financial institution chiefs say is now undermining UK competitiveness.
“Ring-fencing imposes significant and often overlooked costs on businesses, including SMEs, by exposing them to banking constraints not experienced by their international competitors, making it harder for them to scale and compete,” the letter mentioned.
“Lending decisions and pricing are distorted as the considerable liquidity trapped inside the ring-fence can only be used for limited purposes.
“Company prospects whose monetary wants develop into extra complicated as they develop bigger, extra refined, or have interaction in worldwide commerce, are adversely affected given the bounds on companies ring-fenced banks can present.
“Removing ring-fencing would eliminate these cliff-edge effects and allow firms to obtain the full suite of products and services from a single bank, reducing administrative costs”.
In current months, doubts have resurfaced concerning the dedication of Spanish banking big Santander to its UK operations amid complaints concerning the prices of regulation and supervision.
The UK’s fifth-largest excessive road lender held tentative conversations a couple of sale to both Barclays or NatWest, though they didn’t progress to a proper stage.
HSBC, in the meantime, is especially stressed concerning the impression of ring-fencing on its enterprise, given its sprawling worldwide footprint.
“There has been a material decline in UK wholesale banking since ring-fencing was introduced, to the detriment of British businesses and the perception of the UK as an internationally orientated economy with a global financial centre,” the letter mentioned.
“The regime causes capital inefficiencies and traps liquidity, preventing it from being deployed efficiently across Group entities.”
The 4 bosses referred to as on Ms Reeves to make use of this summer time’s Mansion Home dinner – the Metropolis’s annual set-piece occasion – to ship “a clear statement of intent…to abolish ring-fencing during this Parliament”.
Doing so, they argued, would “demonstrate the government’s determination to do what it takes to promote growth and send the strongest possible signal to investors of your commitment to the City and to strengthen the UK’s position as a leading international financial centre”.
