Financial institution chiefs to Reeves: Ditch ring-fencing to spice up UK financial system

The bosses of 4 of Britain’s greatest banks are secretly urging the chancellor to ditch probably the most important regulatory change imposed after the 2008 monetary disaster, warning her that its continued imposition is inhibiting UK financial progress.

Sky Information has obtained an explosive letter despatched this week by the chief executives of HSBC Holdings, Lloyds Banking Group, NatWest Group and Santander UK by which they argue that financial institution ring-fencing “just isn’t solely a drag on banks’ potential to help enterprise and the financial system, however is now redundant”.

The CEOs’ letter represents an unprecedented intervention by many of the UK’s main lenders to abolish a reform which price 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 help the financial system throughout a interval when it’s forcing financial regulators to scrap crimson tape.

Of their letter to the chancellor, the quartet of financial institution chiefs instructed Ms Reeves that: “With world financial headwinds, it’s essential that, in help of its Industrial Technique, the federal government’s Monetary Providers Progress and Competitiveness Technique removes pointless constraints on the power of UK banks to help companies throughout the financial system and sends the clearest potential sign to traders within the UK of your dedication to reform.

“Whereas we welcomed the current technical changes to the ring-fencing regime, we imagine it’s now crucial to go additional.

“Eradicating the ring-fencing regime is, we imagine, among the many most vital steps the federal government may take to make sure the prudential framework maximises the banking sector’s potential to help UK companies and promote financial progress.”

Work on the letter is claimed 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 just isn’t a serious monetary headache for his financial institution.

Different business executives have expressed scepticism about that stance on condition that ring-fencing’s origination was largely seen as being an try to unravel the conundrum posed by Barclays’ huge funding banking operations.

The introduction of ring-fencing pressured UK-based lenders with a deposit base of not less than £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 just lately, the Treasury has moved to extend the deposit threshold from £25bn to £35bn, amid stress from plenty of faster-growing banks.

Sam Woods, the present chief government of the primary 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 determine 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 pressured to considerably improve the quantity and high quality of capital they held as a threat buffer, whereas they have been additionally instructed to create so-called ‘residing wills’ within the occasion that they bumped into monetary bother.

The chancellor has repeatedly spoken of the necessity to regulate for progress fairly than threat – 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 method to regulating its banking business – a reality which the 4 financial institution chiefs say is now undermining UK competitiveness.

“Ring-fencing imposes important and infrequently neglected prices on companies, together with SMEs, by exposing them to banking constraints not skilled by their worldwide rivals, making it more durable for them to scale and compete,” the letter mentioned.

“Lending choices and pricing are distorted because the appreciable liquidity trapped contained in the ring-fence can solely be used for restricted functions.

“Company prospects whose monetary wants turn into extra complicated as they develop bigger, extra refined, or interact in worldwide commerce, are adversely affected given the bounds on companies ring-fenced banks can present.

“Eradicating ring-fencing would remove these cliff-edge results and permit companies to acquire the complete suite of services and products from a single financial institution, decreasing administrative prices”.

In current months, doubts have resurfaced in regards to the dedication of Spanish banking large Santander to its UK operations amid complaints in regards to the prices of regulation and supervision.

The UK’s fifth-largest excessive road lender held tentative conversations a few sale to both Barclays or NatWest, though they didn’t progress to a proper stage.

HSBC, in the meantime, is especially stressed in regards to the affect of ring-fencing on its enterprise, given its sprawling worldwide footprint.

“There was a cloth decline in UK wholesale banking since ring-fencing was launched, to the detriment of British companies and the notion of the UK as an internationally oriented financial system with a worldwide monetary centre,” the letter mentioned.

“The regime causes capital inefficiencies and traps liquidity, stopping it from being deployed effectively throughout Group entities.”

The 4 bosses referred to as on Ms Reeves to make use of this summer season’s Mansion Home dinner – the Metropolis’s annual set-piece occasion – to ship “a transparent assertion of intent…to abolish ring-fencing throughout this Parliament”.

Doing so, they argued, would “reveal the federal government’s willpower to do what it takes to advertise progress and ship the strongest potential sign to traders of your dedication to the Metropolis and to strengthen the UK’s place as a number one worldwide monetary centre”.