UK ringfencing: circular thinking only pays lip service to deregulation

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Ringfencing is a quirk almost as British as drinking black tea with milk and talking about the weather. UK lenders are required to separate retail banking from non-retail activities. This is meant to save taxpayers further bailouts of the kind triggered by the 2008 banking crisis. Whether this is required, given tough global capital standards, is a moot question

On Thursday, the Treasury issued proposals to modestly ease ringfencing. This was little more than a nod to pressure to deregulate the UK’s stagnating markets.

The plan drew on last year’s Skeoch independent review. This suggested changes that included exempting simpler banks that lack large investment banking and trading operations. Ringfencing is irksome, creating hefty administrative burdens and capital inefficiencies.

One ringfencing threshold is the size of deposits, long held at £25bn. The Skeoch review recommended raising these. The Treasury proposals also advocate doing so, to £35bn. That could increase retail competition among smaller deposit takers that may have suppressed deposits to avoid increased oversight.

More relief could come via the Treasury’s secondary threshold proposal. This would exempt retail banks which have trading assets of less than 10 per cent of total tier one capital, unless they are classed as a globally significant bank. On this basis, Virgin Money should get an exemption.

Other tweaks by the Treasury seem targeted at banks which may wish to expand their banking overseas. At present, ringfenced banks can only have operations within the UK and the European Economic Area. This sounds a little less about opening branches in the US and rather more about encouraging business with tax havens such as the non-EEA Channel Islands.

The Treasury consultation smacks of the timidity characteristic of a government with little in the way of a plan for business or the economy. It does not address the central question: why have ringfencing at all?

UK banks, like rivals elsewhere, are moving towards implementing the stricter capital regime of Basel 3.1. Lenders here survived this spring’s banking turmoil better US or Switzerland. But so did EU counterparts, who do not have ringfences. They are a British quirk the British should reconsider.