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By 2019, Britain’s banks must have ringfenced their retail banking operations from their parent companies, in one of the many post-crisis regulatory reforms designed to make the financial system safer and ensure investors rather than taxpayers are on the hook for bank failures.
It is a vast project, with implementation costs that run into billions of pounds.
At the heart of the ringfencing idea — conceived by the government-appointed Independent Commission on Banking, chaired by John Vickers, in 2011 — is the principle that the vital functions of a bank should be protected from potentially more volatile business activities such as investment bank trading. These should be housed in the “non-ringfenced” part of a group so that if they get into trouble, that entity could be wound down by regulators without having to be unpicked in a hurry from the bits that really matter (current accounts, payment systems and the like).
The rules mean that separate company structures must be set up so that ringfenced banks have their own boards, capital backing and profit and loss accounts.
Barclays, which is spending £1bn on ringfencing, is further ahead than most in its preparations. Its separate entities will go live next Easter and their performance is already being reported on a standalone basis, exposing the relative strength of the units on each side of the divide.
As of the third quarter of 2017, for example, Barclays’ ringfenced bank looks better capitalised — with a tangible equity to risk-weighted asset comparison showing a ratio of 14 per cent, compared with 13 per cent for the non-ringfenced bank.
Although ringfencing has been implemented broadly as envisaged by the Vickers report, some critics are upset that regulators have not made the capital differential greater. “The missing part is that there is a much lower systemic risk buffer than expected for the ringfenced banks,” says one person close to the commission.
That is one explanation for the rather surprising decision by top credit agencies such as Standard & Poor’s and Fitch to rate the creditworthiness of ringfenced and non-ringfenced banks basically on a par with each other.
Compare that with what the Vickers report predicted: “Ringfenced banks would be simpler and less volatile entities,” meaning a potential “downgrade of the credit rating of some non-ringfenced banks by up to 2 notches”.
Full article on Financial Times (subscription required)