Bank of England sets GBP2.2bn retail bank ring-fencing requirement

Proposals by the Bank of England would require the UK's big banks to hold up to £3.3bn of capital under new ring-fencing rules designed to make their retail operations more resilient to potential market crashes.

From 1 January 2019, banks with core deposits greater than £25bn from individuals and small businesses will be required to ring-fence their core retail activities, the Bank's Prudential Regulation Authority (PRA) arm stated.

Based on the size of their UK retail operations the new rules would most likely only apply to HSBC, Royal Bank of Scotland Group, Lloyds Banking Group, Barclays, Santander and Co-operative Bank.

Challenger banks, such as Spanish-owned TSB, might expect to grow to that size by 2019.

The PRA published two consultation papers on Thursday on ring-fencing and operational continuity that look to ensure ring-fenced banks would be protected from shocks originating in other parts of their groups, as well as the broader financial system, and can be easily separated from their groups in the event of failure.

“Making our firms more resilient has been at the forefront of our post-crisis reform agenda. Today represents an important step forward in achieving this aim," said Andrew Bailey, deputy governor of the Bank of England and chief executive of the PRA.

"We have provided clarity for affected banks on how we will implement ring-fencing and this will enable firms to take substantial steps forward in their preparations for structural reform."

According to the PRA's proposals, which will be open to consultation until 15 January 2016, applying this approach may result in increased capital requirements for some firms, with banks said to increase their capital requirement by between £2.2bn and £3.3bn by the time the rules kick in.

Putting the changes in place is expected to add about 5% to banks’ running costs, with the BoE calculating that a bank with £4bn operating costs would face a £200m one-off cost and continuing costs of £120m a year.

But, in a move that appears designed to appease banks such as HSBC, which threatened to exit the UK due to its objection to the ring-fencing plans, the PRA said it will not prevent ring-fenced high street businesses from paying dividends to their parent companies if their capital levels are above regulatory requirements.

Atif Latif, director of trading at Guardian Stockbrokers said that although headlines suggested that the proposed measures would be a negative for all the UK banks, his view was that the overall effect will be varied, with Lloyds and RBS less affected than HCBC and Barclays due to the size of their investment banking (IB) arms.

"If the splitting of retail and investment banks will occur then LLOY (which does not have a large IB franchise), RBS (which has been in the midst of a radical downsize and asset sale of IB operations) will be less impacted by these potential changes," he wrote in a note to clients.

Latif suggested HSBC and Barclays may perhaps refocus back on IB revenues and rebuilding of the BarCap brand if Jes Staley is confirmed as the new CEO, which he thought would have potentially more impact given relative size of their IB departments compared to Lloyds and RBS.

"The key driver for this will be what assets will have to be ring fenced but overall we are not looking at anything too material that has not been priced in by the market at the current level and the overhang on the sector should disappear," he said.