Capital rules imposed on Britain’s high street banks after bailouts during the global financial crisis have not harmed competition. But it may need simplifying. Since January 2019, banks like HSBC, Lloyds, NatWest and Barclays with deposits of 25 billion pounds or more. They have been required to hold extra capital around their retail divisions to insulate them from any blow-ups in separate trading and investment operations. The so-called ring-fencing regime was introduced after Britain’s taxpayers had to bail out several undercapitalised banks.
The review commissioned by finance ministry stated that the ring-fencing regime has had no significant impact on competition in retail banking or its submarkets. The current rules have resulted in unintended consequences that create unnecessary rigidity for customers, banks, and regulators. Banking lobby UK Finance said that Britain should consider dismantling the regime or risk harming post-Brexit competitiveness. This is stated over the last year. The review stated that the ring-fencing regime has the potential to constrain the competitiveness of UK banks. But to date this impact has not been substantial.
The review, chaired by finance industry veteran Keith Skeoch, signalled that later this year it would recommend increasing flexibility in the rules. This is to reduce unnecessary complexity, rather than any radical surgery. The Bank of England’s head of banking supervision, Deputy Governor Sam Woods, has vowed to defend the ring-fencing rules. This is as the banks lobbied for the 25-billion-pound threshold to be raised. Goldman Sachs closed its easy access saving business in 2020 to new customers in Britain. And, that too after deposits surged close to the 25 billion thresholds. Banks have warned that ring-fencing has triggered unfair competition in mortgages. Because, the banks inside the ring-fence use deposits to fight for more market share.
The ring-fencing has not damaged competition in consumer credit, small business lending or mortgages. The review said that the ring-fencing rules have helped to bolster financial stability. Though these benefits have not been observed for smaller and less complex banks which don’t have investment banking operations. Woods has already flagged plans for simpler rules for smaller lenders. Banks have separate rules on resolution and the review said that these rules coupled with ring-fencing added complexity to regulation.