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Dear banks: ringfencing is here to stay

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It’s not that ringfencing is unpopular. It’s just that nobody seems to like it very much.

Industry feedback on the rules requiring lenders in the UK with more than £25bn in deposits to separate their consumer operations from racier investment banking activity included “little or no evidence put forward on the positive impacts of the ring-fencing regime”, the panel set up to review the policy said last year.

But this isn’t a popularity contest. And, rightly, the post-crisis division designed to make it easier for policymakers to deal with failing banks looks set to stay.

This, admittedly, is based on the reading of regulatory tea leaves. The review panel this week released a short interim statement, ahead of final recommendations going to the Treasury later this year. But it’s enough to give a sense of where this might land.

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It’s worth reflecting here on how the regulatory zeitgeist has changed. In the aftermath of the financial crisis, the push for independent reviews was part of the so-called electrification of the ringfence. Andrew Tyrie, chair of the parliamentary commission on banking standards, wrote in this paper in 2013, “All history tells us that banks will be at the ringfence like foxes to a chicken coop unless they are incentivised not to do so.” 

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The threat was introduced that if banks gamed the system, a full, Glass-Steagall-style split of retail from investment banking could be imposed on the sector.

This review, which was always intended to have a broader mandate, found no evidence that banks have abused the ringfence. But the backdrop has certainly changed: worrying about whether onerous regulation is harming UK competitiveness is back in fashion. And this look at how ringfencing has affected the banking market was accompanied by the type of vociferous industry lobbying for abolition or overhaul that helped convince policymakers that electrification was needed a decade ago.

Yet the panel behind the review, led by former Standard Life Aberdeen boss Keith Skeoch, has given short shrift to the sector’s most common complaints: in particular, the idea that the policy trapped liquidity inside the UK fence, or that this had then supercharged competition in the mortgage market. Other factors explained surplus liquidity, a global banking phenomenon, it said.

On the face of it, the interim findings suggest two broad areas for changes. The first is how the regime operates here and now. Some of the system’s greatest supporters privately concede that it has been more rigid and unyielding in practice than was intended. This is, partly, a result of how banks chose to enact the rules. The details will be crucial but the regime could be made more flexible, with fewer unnecessary costs, without doing harm to the fundamental idea.

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The second is whether the regime needs to be refined or updated so that it can better address the goals of resolving large failures, and safeguarding financial stability in the future. Here the panel said ringfencing could constrain the competitiveness of UK banks but hadn’t meaningfully as yet. It also flagged inconsistencies between ringfencing rules and other regulatory developments, like the definition of what services are critical to the economy under the resolution regime. That suggests some bigger-picture policy decisions about how regulatory regimes that are meant to act as allies can or should align.

It is striking that, even as the regulatory pendulum swings in the industry’s favour, the mood music is that any shortcomings may not necessitate a change to the £25bn cap, a bugbear to Goldman Sachs’s retail deposit-gathering efforts in particular. And that, while the review found the rules had indeed created a more resilient sector, there could be scope for tweaks for smaller and less complex banks with “limited investment banking activities”.

Defining that, no doubt, will be another target for sector lobbying. But in a regime concerned with financial stability and too big to fail institutions, it does at least make some sense.

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