Financial regulation is back in focus. In the US, the talk is of reversing post-crisis regulation; in the UK, implementation of new rules grinds on - to the industry’s chagrin. The latest source of friction is ringfencing rules.
The Bank of England is concerned that some British banks’ compliance efforts are behind schedule. By the start of 2019, Britain’s largest lenders will need to put their retail banking units inside a heavily capitalised subsidiary, protecting them in case the group fails.
Banks are struggling to adapt. The biggest headache is the coincidence of timing with Brexit. If Article 50 is triggered, as expected, in March, the two-year negotiation window would mean the UK formally leaves the EU in the spring of 2019. By then, banks will have to come into line with new international regulations, dubbed Basel III, which raise capital requirements. They must adopt an onerous new accounting standard, IFRS9, which increases the amount of money that lenders must set aside against soured loans.
Implementation costs will run to billions of pounds, and the effort required to comply simultaneously with ringfencing and Brexit presents operational risks. Even Sam Woods, who heads the Prudential Regulation Authority, the financial regulator, acknowledges that “in an ideal world we would not restructure our banking system and extricate ourselves from the EU at the same time”.
Banks, predictably, are complaining. Some argue the drive for ever-tougher UK regulation will further undermine global competitiveness, especially if US president-elect Donald Trump presses ahead with repealing portions of the Dodd-Frank banking reforms.
There is something to this worry. And by the time ringfencing is implemented, it may be unnecessary. Switzerland aside, no other country has introduced anything similar. Since its conception in 2011, the idea has been overtaken by other rules — higher capital requirements, compulsory issuance of “bail-inable” bonds that can recapitalise banks in distress, and new international resolution rules, governing the windup of failing banks.
But even if the UK’s response to the crisis turns out to be over-engineered, ringfencing will help ensure a smooth resolution regime. Resolutions, by nature, must happen quickly and under duress. Neatly segmented UK units will help.
Ringfencing will happen. The legislation is in place and the PRA is not about to go soft on implementation. The government-appointed Vickers commission that came up with the idea comprised some well-known names, including Oxford academic Sir John Vickers, banker Bill Winters and Financial Times columnist Martin Wolf. Less known is that Mr Woods himself, then a government mandarin, ran the secretariat of the commission and co-ordinated its final report.
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