The bosses of 4 of Britain’s largest banks are secretly urging the chancellor to ditch essentially the most important regulatory change imposed after the 2008 monetary disaster, warning her 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 through which they argue financial institution ring-fencing “is just not solely a drag on banks’ skill to assist enterprise and the economic 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 avenue 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 probably be seen as a direct problem to the federal government to take drastic motion to assist the economic system throughout a interval when it’s forcing financial regulators to scrap crimson tape.
It can, nonetheless, ignite controversy amongst those that consider that ditching the UK’s most radical post-crisis reform dangers exacerbating the implications of any future banking business meltdown.
Of their letter to the chancellor, the quartet of financial institution chiefs advised Ms Reeves: “With international financial headwinds, it’s essential that, in assist of its Industrial Technique, the federal government’s Monetary Companies Development and Competitiveness Technique removes pointless constraints on the power of UK banks to assist companies throughout the economic system and sends the clearest doable sign to buyers within the UK of your dedication to reform.
“Whereas we welcomed the current technical changes to the ring-fencing regime, we consider it’s now crucial to go additional.
“Eradicating the ring-fencing regime is, we consider, among the many most vital steps the federal government might take to make sure the prudential framework maximises the banking sector’s skill to assist UK companies and promote financial progress.”
Work on the letter is alleged to have been led by HSBC, whose new chief govt, 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 govt, though he has publicly stated previously that ring-fencing is just not 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 considered as being an try to resolve the conundrum posed by Barclays’ huge funding banking operations.
The introduction of ring-fencing compelled UK-based lenders with a deposit base of a minimum of £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 establishing 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 strain from numerous faster-growing banks.
Sam Woods, the present chief govt of the primary banking regulator, the Prudential Regulation Authority, was concerned in formulating proposals printed by the Sir John Vickers-led Impartial Fee on Banking in 2011.
Laws to ascertain ring-fencing was handed within the Monetary Companies Reform (Banking) Act 2013, and the regime got here into impact in 2019.
Along with ring-fencing, banks had been compelled to considerably enhance the quantity and high quality of capital they held as a danger buffer, whereas they had been additionally instructed to create so-called ‘dwelling wills’ within the occasion that they bumped into monetary hassle.
The chancellor has repeatedly spoken of the necessity to regulate for progress slightly than danger – a phrase the 4 banks hope will now persuade her to desert ring-fencing.
Britain is the one main economic system to have adopted such an strategy to regulating its banking business – a truth which the 4 financial institution chiefs say is now undermining UK competitiveness.
“Ring-fencing imposes important and sometimes ignored prices on companies, together with SMEs, by exposing them to banking constraints not skilled by their worldwide opponents, making it more durable for them to scale and compete,” the letter stated.
“Lending selections 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 change into extra advanced as they develop bigger, extra refined, or have interaction in worldwide commerce, are adversely affected given the bounds on providers ring-fenced banks can present.
“Eradicating ring-fencing would remove these cliff-edge results and permit companies to acquire the total 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 big Santander to its UK operations amid complaints in regards to the prices of regulation and supervision.
The UK’s fifth-largest excessive avenue lender held tentative conversations a couple of 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 economic system with a worldwide monetary centre,” the letter stated.
“The regime causes capital inefficiencies and traps liquidity, stopping it from being deployed effectively throughout Group entities.”
The 4 bosses known 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 “exhibit the federal government’s willpower to do what it takes to advertise progress and ship the strongest doable sign to buyers of your dedication to the Metropolis and to strengthen the UK’s place as a number one worldwide monetary centre”.
