Ring-fencing for UK banks .... a decent idea, but out of date before it even begins ?

Wednesday 3rd June 2015

Ring-fencing for UK banks .... a decent idea, but out of date before it even begins ?

 "Bank ring-fence is redundant  --  it's time to abandon it" . Personal View by Sir David Walker, The Daily Telegraph, p.B4

In the fall-out of the global financial crisis, few would have argued the need for a radical plan to insulate depositors (and by extension the taxpayer) from the twin dangers posed by irresponsible behaviour on the part of banks and a regulatory system plainly no longer up to the job. The plan that emerged was to separate the banks' retail and commercial arms from its other operations, in particular their investment banking businesses that were perceived to have been at the heart of the crisis.. Ring-fencing, as it's known, is due to come into effect in 2019.

Quite a few within the banking industry queried the wisdom of this solution to the problem at the time. They argued that rather than being incurred through trading losses, the largest hits were sustained through traditional bank lending (especially in the hugely risky property sector) , and that these operations would still fall within the so-called ring-fenced bank. Whilst one might legitimately ask the question "But which came first ?" , it's of little consequence.  Out of favour bankers had a very weak hand politically, and the man in the street (and therefore politicians) demanded the security offered by the proposal after a period when trust and confidence in the system had been so badly eroded. Fair enough, too.

Except times change ..... Sir David Warner argues that the raft of new regulation implemented in recent years means that ring-fencing is already redundant. New requirements on capital, liquidity, leverage and provisions and a host of both domestic and EU banking directives protect depositors at least as well as ring-fencing would. If Sir David's view that ring-fencing would do little to restore the public's faith in the banking industry could be seen as a little one-eyed, he does make some telling points about the likely costs to UK banks, already under the cosh from the bank levy.

The Treasury estimates that implementation costs will be somewhere of the order of £2.5b , with further annual running costs of £4.0b . In some shape or form, these will end up being passed to the customer. Furthermore, no other nation is going down this route or can understand why the UK would saddle its banking sector with a handicap that would only make it less competitive.

Is there time to reverse the strategy ? Well ..... only just.

Is it likely to happen, politically ? Er ..... no.