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Britain’s banks are debating whether regulatory ringfences that were set up after the financial crisis should be bulldozed. Demolitionists — led by HSBC — say the rules trap capital that could help the wider economy. But they should remember that fences keep things out as well as in.
Large UK lenders have to legally separate their retail banking businesses from the rest, to reduce the risk that depositors could be hurt by shocks that started in overseas markets or investment banking.
Most big banks think the costs of this “ringfencing” are too high, especially as stronger capital levels and more advanced bank resolution regimes have reduced the risks around large failures. Freeing up funds that are kept inside ringfences could make it easier to lend to large companies, or earn higher returns in other markets.
Even some small banks that aren’t directly affected would appreciate reform — they believe the rules have hit profit margins by encouraging large banks to dump spare cash into areas like the mortgage market.
One vocal defender of the current regime is Barclays — perhaps surprisingly, considering it runs the largest British investment bank. Chief executive C.S. Venkatakrishnan — known as Venkat — says the priority should be protecting consumers. Such a noble position is easier to take when Barclays is already focused on bolstering its position in the UK, and has less to gain from a regulatory rejig that could reopen debate over the scale of its investment bank.
As the only British group with a major presence in the US, Barclays may also be extra aware of the danger of American rivals. British bankers respect the growth of fintechs like Monzo and Revolut, but no competitor scares them like Goldman Sachs or JPMorgan — and both of them are keen to see the ringfence disappear.
Goldman uses deposits in its Marcus savings accounts to fund investment banking. It has avoided crossing the deposit threshold where it would have to separate its consumer business. If the rules were removed, it could raise as much cash as it wants, eating into the profitable deposit bases of established banks. JPMorgan’s Chase presents the same risk, plus the additional threat that lower costs would encourage it to speed up investment in its nascent UK lending operations.
There are some real flaws in the ringfencing rules, like restrictions on “shared services” that make it hard to use cyber security or anti-fraud expertise within a large group.
But the sudden push for more drastic change is opportunism on the part of banks hoping to benefit from a broader deregulatory trend. There have been two major reviews of ringfencing in the past three years, both of which found it was working as intended; not enough has changed since then to suggest they would come to a different conclusion now.
