Britain’s big banks will need to hold billions of pounds of extra capital when they have to separate their domestic high street banking operations from risky areas, under details set out yesterday.
The Bank of England is pressing on with plans to ensure banks’ day-to-day business of running personal and small firms’ bank accounts is safe from riskier investment banking type activities, and to ensure the former continue in a crisis.
“Making our firms more resilient has been at the forefront of our post-crisis reform agenda,” said BOE deputy governor Andrew Bailey, who heads the central bank’s regulatory arm, the Prudential Regulation Authority (PRA).
British high-street banking operations will be ‘ring-fenced’ from the rest of the bank and will effectively have to treat their parent company as a separate company. The aim is to better protect taxpayers from having to bail out banks.
The BOE said in a consultation paper yesterday that the changes would require the affected banks to hold £2.2-3.3 billion of extra capital. That amount is likely to rise as ring-fenced units will also be told to hold an extra ‘systemic risk’ buffer, which will be set by another arm of the BOE, its Financial Policy Committee, by the end of May.
The PRA’s proposals said the ring-fenced parts of banks would be allowed to pay dividends to their parent company.
Separate proposals to ensure banks can keep running if hit by a crisis were likely to cost banks a one-off amount of five per cent of their operating costs, and have ongoing annual costs of three per cent, the BOE said.
For a big bank, this could be equivalent to a one-off cost of £200 million and an annual cost of £120 million.
Britain’s big banks will need to separate their domestic retail banking operations into separately governed and funded entities from the start of 2019.
Banks were concerned that if the rules were applied too strictly lenders would lose control of a major part of their business and would be unable to move capital from the ‘ring-fenced’ unit to the parent group. The BOE said ring-fenced units will be able to share most critical functions, such as technology and legal resources, with their parent group.
The rules for banks will come in from 2019. They will affect any bank with more than £25 billion of deposits, which is expected to affect six firms – HSBC, Lloyds, Barclays, Royal Bank of Scotland, Santander UK and Cooperative Bank.
Banks are aiming to have their ring-fencing structures up and running from the start of 2018, a year ahead of deadline. How banks structure their ring-fenced bank could force them to significantly change their business models.