The new ring-fencing rules come into force in 2019 and are created to protect taxpayers and banking customers in any future financial crisis by ensuring retail operations are insulated from more risky investment banking activities. “The PRA propose(s), however, permitting ring-fenced banks to pay dividends to their parent companies as long as the PRA is informed and the payments will not harm their stability or resilience”.
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The BoE said in a consultation paper on Thursday that the changes would require the affected banks to hold 2.2 billion to 3.3 billion pounds ($3.4-5.1 billion) of extra capital.
The PRA has already set out other proposals relating to the governance and management of newly restructured banks, with strict regulations about the independence of directors of ring-fenced entities.
Alan Bainbridge, global head of banks at law firm Norton Rose Fulbright, said the proposals were “a clear signal that a “share-of-group” approach to capital is not going to be viewed as compatible with the ring-fencing purposes” set out in United Kingdom legislation. Lenders will have to hold capital against loans made between the ringfenced and non-ringfenced bank.
Andrew Bailey, a deputy governor of the Bank, said: “Making our firms more resilient has been at the forefront of our post-crisis agenda”. Threadneedle Street said a bank with £4bn operating costs would face a £200m one-off cost and continuing costs of £120m a year.
Banks are preparing to lobby regulators in a last ditch bid to limit the amount of capital they will have to hold in their ring-fenced retail operations, as the Bank of England closes in on a decision next May on buffers for the high street lenders.
The Government has gone further with measures to “electrify” the ring-fence separating retail and investment banking operations, meaning that regulators will have powers to order the full break-up of individual institutions if they do not comply with the new rules. The proposed rules also mean that a ring-fenced bank can be more easily detached from the wider group by ensuring intragroup arrangements operate on an arm’s length basis – helping ensure important services remain available in the event of a failure of other parts of the group.
Those rules have led a few banks to consider applying for waivers, while Lloyds is expected to seek a waiver for the broader restructuring because of its limited investment banking activities. 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.
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A few of the shortfall could be addressed by the capital-accretive sale of assets, while it might also be possible to transfer a few capital from banks’ non-ring-fenced operations into their segregated entities.
