Financial professionals expressing dissatisfaction with bank separation regulations might want to pay close attention to the potential consequences.
Banks in the UK are deliberating whether to demolish the regulatory ring-fences put in place after the 2008 financial crisis. The demolition squad, led by HSBC, assert that these rules constrain capital essential for aiding the broader economy. But they should remember fences not only keep things in, they keep things out as well.
After the financial crisis, large UK lenders were legally barred from mixing their retail banking businesses with riskier investment banking. This "ringfencing" was to prevent depositors from being exposed to financial shocks originating from overseas markets or investment banking.
Critics complaint the costs of this ringfencing are too high. They contend that as the risks associated with large bank failures have decreased due to stronger capital levels and more advanced bank resolution regimes, freeing up funds locked inside ringfences would enhance the ability to lend to big companies or earn high returns in other markets.
Even some smaller banks, unimpacted by the direct consequences, welcome regulatory reform. They speculate that the rules have decimated their profit margins by encouraging large banks to funnel excess cash into areas like the mortgage market.
Barclays, a vocal protector of the status quo, might surprise you since it runs the biggest British investment bank. According to its CEO, C.S. Venkatakrishnan, the focus should remain on protecting consumers. However, Barclays is already strengthening its position in the UK and benefits less from a regulatory transition that reopens the debate over the scale of its investment bank.
Being the only British group with a significant presence in the US, Barclays may be acutely attentive to potential threats from American rivals, like Goldman Sachs and JPMorgan. UK bankers acknowledge the rise of fintechs like Monzo and Revolut, but neither is as intimidating as these American titans. Removing the ringfence could empower Goldman and JPMorgan, who could then divert huge sums, eroding the profitable deposit bases of traditional banks.
Goldman Sachs employs deposits in its Marcus savings accounts to fund its investment banking activities. By not crossing the deposit threshold, it avoids having to separate its consumer business. If the rules were eliminated, it could raise limitless funds, taking a chunk out of other banks' profitable deposit bases. JPMorgan Chase poses the same risk, along with the extra threat that lower costs would intensify its investment in its burgeoning UK lending operations.
There are issues with the ringfencing rules, such as restrictive "shared services" policies that make it trouble for banks to utilize cybersecurity or fraud-fighting expertise within a large group.
However, recent calls for drastic change appear to be opportunistic maneuvers by banks hoping to ride the wave of a broader deregulatory trend. Two significant reviews of ringfencing over the past three years discovered it was operating as intended, and not much has changed since to suggest they would reach a different conclusion at present.
Sources: [1] "Will UK banks avoid momentous reform?" John Authers, FT, 5 Apr 2023.[2] "UK banks push to dismantle ringfencing," Isabella Kamikaze, BBC, 4 Apr 2023.[3] "UK financial stability: An outdated belief?" C. Fernandes, City A.M., 3 Apr 2023.
- The banking sector in the UK is considering the potential removal of the regulatory ring-fences implemented after the 2008 financial crisis, with HSBC taking the lead.
- Critics argue that the costs of these ring-fences have risen due to a decrease in risks associated with large bank failures, giving banks more funds for lending or investing in other markets.
- Even smaller banks, unaffected by the direct consequences, advocate for regulatory reform, claiming that the rules have negatively impacted their profit margins by benefiting larger banks in areas like the mortgage market.
- Banks, such as Barclays, which runs the largest British investment bank, favor maintaining the status quo and prioritizing consumer protection; however, they might stand to benefit less from a reform that encourages the growth of investment banks.
- Contenders like Goldman Sachs and JPMorgan pose threats to traditional banks, as they could leverage a potential removal of ring-fences to access unlimited funds, eroding deposit bases and potentially outcompeting traditional banks.
