Dismantle ‘entrenchment’ rules to preserve competitiveness, UK banks say


A woman exercises with a dog near the Financial District in the City of London, London, Great Britain, April 30, 2021. REUTERS / John Sibley

LONDON, Oct. 1 (Reuters) – Britain should consider dismantling the mandatory capital segregation for retail banking introduced in the aftermath of the global financial crisis or risk hurting post-Brexit competitiveness, a group said on Friday bank pressure.

The requirement for banks with deposits of 25 billion pounds ($ 34 billion) or more to amortize their retail divisions with additional capital was a fundamental reform after the financial crisis of 2007-09, when taxpayers have injected billions into stable lenders such as Royal Bank of Scotland, now renamed NatWest (NWG.L).

The cantonment rules are intended to protect depositors from any explosion in a bank’s separate business operations.

Britain launched a review of the fence rules in April, though Bank of England Deputy Governor Sam Woods has vowed to defend them to the last drop of blood. Read more

UK Finance, which represents banks such as HSBC (HSBA.L), Lloyds (LLOY.L) and Barclays (BARC.L), said a lot has changed since the financial crisis with banks holding much more capital and liquidity, which makes the cantonment “surplus to needs”.

The rules add complexity and costs, which could hurt the sector’s competitiveness, UK Finance said in its response to the review, which is due to report next year.

UK Finance submitted its response in June and it was made available to Reuters on Friday.

There should be a ‘root and branch’ assessment of the purpose, design and operation of the cantonment, taking into account its original objectives, benefits and negative and unintended consequences, UK Finance said.

“We would ask the review panel to consider dismantling the regime if there was evidence to suggest that the costs outweigh the benefits,” he said.

No other country has introduced such a “gold-plated” regime for banks, which demonstrated their resilience to market shocks last year when pandemic lockdowns unfolded, UK Finance said.

At the very least, significant changes were needed, such as a higher threshold to trigger cantonment, he said.

“We recommend that the review committee explore the equivalent Swiss regime which has the region’s overall economic and competitive aspects as its main basis, supported by a strong capital, liquidity and regulatory framework,” said UK Finance.

($ 1 = 0.7410 pounds)

Reporting by Huw Jones; Editing by David Clarke

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