In less than six weeks, ten years on from the financial crisis, one of the largest ever reforms to the structure of the UK banking industry comes into force. While most will notice little difference on day one, ring-fencing
the largest UK banks has involved significant changes behind the scenes.
The Bank of England says this reform will make the provision of core banking services more resilient, and protect taxpayers from further bail outs. These are real benefits but are conditional on the ring-fence being maintained over time, meaning this will be a continuous process for both the PRA and the banks.
This was outlined in a speech “From Construction to Maintenance: Patrolling the ring-fence” given by James Proudman, Executive Director, UK Deposit Takers Supervision.
Financial crises generate significant and persistent costs. The Bank of England has estimated that the costs of crises amount to 75% of GDP on average. The previous crisis resulted in the Government providing £65 billion of capital to RBS and Lloyds to prevent them failing and disrupting the provision of vital banking services to their customers. Since then, a comprehensive regulatory reform package was developed – which in large part has now been implemented – to reduce the likelihood that such a crisis could happen again.
A decade on from the financial crisis, one of the largest ever reforms to the structure of the UK banking industry is coming into force. By 1 January 2019, the largest UK banking groups must have implemented the ‘ring-fencing’ – or separation – of their UK retail business from their international and investment banking operations. This means that the core banking services on which retail and small business customers depend should not be threatened should things go wrong in wholesale financial markets or the global economy.
Banks have now largely completed the ring-fencing of their retail operations, and have done so with little disruption to their customers and counterparties. The PRA’s supervisory focus will turn to ensuring the ring-fences that have been established are effective in practice, and remain so. Ring-fencing both broadens the range of regulatory requirements, and increases the intensity of supervision, for the groups in scope. As such, ring-fencing will remain a focus for the PRA – as well as for the banks themselves – in the coming years.
All large UK banking groups – defined as those with ‘core’ retail deposits greater than £25 billion – are required to implement ring-fencing by 2019. Currently, seven banking groups cross this threshold. Between them, these groups have around £5 trillion of assets, both in the UK and overseas.
The ring-fencing regime is designed to be consistent with the other parts of the post-crisis regulatory framework. The most systemically-important ring-fenced banks will be held to higher capital requirements. The Systemic Risk Buffer will be applied to ring-fenced banks to ensure they are adequately capitalised and resilient to shocks. We expect ring-fenced banks to have, on average, around 1.5 percentage points more high-quality ‘Tier 1’ capital than non-systematically important banks. And a ring-fenced bank will not be able to be capitalised by debt raised externally by its group, which would give rise to so-called ‘double leverage’.
Overall, the Bank estimates that ring-fenced banks’ total loss absorbency will be, on average, around 27% of their risk-weighted assets, higher than the 17% recommended by the ICB. Ring-fencing also helps improve the resolvability of the big UK banking groups. The resolution strategy for groups including ring-fenced banks will typically involve a bail-in at the level of the holding company. Bail-in would recapitalise the relevant entity by passing losses up to the holding company to be borne by shareholders and debt-holders. This should stabilise the group. Structural separation then provides authorities with additional options as part of any subsequent restructuring.
Ring-fencing, together with other elements of the post-crisis regulatory landscape, means that the key providers of important retail banking services are less likely to fail following a shock to the economy or the financial system. But if banks do get into trouble, there will be greater certainty that important banking services will continue to be provided without disrupting customers and without the need for Government bail-outs. This is the key difference ring-fencing delivers should we experience a repeat of the financial crisis.
To comply with the legislation, each banking group has had to restructure to ensure that their new ring-fenced banks can meet prudential requirements on a standalone basis, have their own governance arrangements and have viable business models.
In some cases, a banking group’s ring-fenced bank has been established as a brand new legal entity. Setting up a bank from scratch is a considerable undertaking, even more so for a bank which will have millions of customers from day one. In fact, last year the PRA authorised the three largest new banks ever established in the UK. And by the end of this year, we will have assessed and approved more than 50 applications for senior management positions within these groups, and considered the suitability of their proposed prudential sub-groups, containing hundreds of entities between them. Ring-fencing also resulted in the Bank helping ring-fenced banks undertake around 20 on-boarding operations to payment systems settling across the books of the Bank, and admitting six banks to the Sterling Monetary Framework.
And as you have already proven John, the deposit insurance scheme is just that, a scheme! One that will allow the looting of most, if not ALL depositors monies! Hope you’ve got gold?
I believe the only ring fencing that will be done, will be done to their OWN money, no one else’s. This editorial is just what the elite want you to believe “their narrative”, when many of us already know this is going to be the biggest robbery in the history of man! Time for UK populist to double down on food and get their money OUT of the financial institutions, ALL OF IT!