Two architects of Britain’s post-crisis financial regulation have warned against “reckless” abandonment of rules forcing the separation of major banks’ retail and trading divisions after an independent panel suggested “ring fencing” could be replaced by measures that ensure that banks can fail safely.
The Treasury-commissioned Skeoch report said last week that the three-year-old ring-fencing regime intended to protect savers’ money from bursts of trade should be maintained for the time being. But it also argued for the potential foreclosure of some banks on the grounds that they were “resolvable,” a term meaning they could fail with minimal public harm.
According to the report, measures to ensure bank resolvability should play a “more prominent role” over the longer term than ring fencing, paving the way for moving away from the costly segregation of banking activities and for newer measures that protect taxpayers. through provisions such as the forced conversion of some bonds into shares, a process known as “bail-in”.
A task force from the UK Treasury and the Bank of England will now consider recommendations on the regime’s future for banks with over £25bn in deposits, a group that currently includes HSBC, Barclays, Lloyds, NatWest Group, Santander, Includes Virgin Money and TSB. †
“If anyone in the world believes bail will work, it’s me,” said Sir Paul Tucker, a senior fellow at Harvard University who served as deputy governor of the Bank of England from 2009 to 2013 and chaired the G20. group that designed the bail package. “But it would be reckless for Britain to put all its chips on there until bail-in has worked in a massive live case, not just desktop drills, and even then I’d keep it just in case. Ringfencing helps protect citizens from the banking of Armageddon.”
Sir John Vickers led the 2011 report that spawned ringfencing © Andrew Harrer/Bloomberg
Sir Paul Tucker chaired the G20 group that designed the bail package © Martha Stewart
Sir John Vickers, who led the 2011 report spawning ring fencing, said the Skeoch report’s apparent treatment of “resolution” as an alternative to ring fencing was “puzzling”. Keith Skeoch and his fellow experts suggested that a bank could be barred from ringfencing if the Treasury and regulators believed it could be “dissolved” with minimal impact and that its resilience would not be harmed by the integration of its trade and retail activities.
“If a bank is big and complicated enough to be in the regime, it doesn’t seem likely that it can be solved just like that. If the threshold is never reached [for exclusion], why have the power?” Vickers said, adding that ring fencing improved the resolvability of banks because they were already neatly divided into separate parts.
More broadly, Vickers – who is now a professor of economics at All Souls College, Oxford – said minimizing the damage from bank failures “was just one of the many reasons we went for ring fencing in 2011”. of retail banking trading divisions, which they said required a more sedate approach, and to impose separate governance structures on companies that are inherently different.
It has been a costly and painful journey for the UK banking sector. HSBC alone has spent £1.5bn separating the governance, financing and operations of its UK retail bank from the rest of its operations. Smaller banks, including Marcus of Goldman Sachs, have argued that the regime is effectively imposing a £25bn cap on their deposits, as the cost of doing business skyrockets once that threshold is crossed.
A spokesperson for the Skeoch panel said that “the ring fencing regime is worth sticking to right now, but needs to be more adaptable to better serve customers and address future risks” and it needs to be better be matched to the solution.
“Over time, the gap that develops between ring fencing and resolution regimes is likely to widen,” the spokesperson said, adding that the resolution regime “is now catching up with ring fencing by providing a more comprehensive solution” to ensure that banks can fail safely.
The Treasury said: “We welcome the independent panel’s comprehensive set of recommendations and will establish a task force with the Bank of England to review the options recommended by the panel and will publish a response from the government later this year.”
This post UK financial regulation architects warn of scrapping ‘ring fencing’
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