Last updated: November 8, 2012 7:40 pm

Warning on competition between banks

Medium-sized banks will have a competitive advantage over the rest of the sector unless they are included in plans to ringfence retail operations from riskier investment banking activities, building societies and large banks have warned.

In written submissions to the Parliamentary Commission on Banking Standards, both the Building Societies Association and Royal Bank of Scotland have complained about proposals to exempt banks with less than £25bn in deposits from having to ringfence their retail businesses.

The Building Societies Association called for the threshold to be dropped to £5bn or £10bn in total assets, while RBS said all banks should be exposed to the legislation, which seeks to protect critical banking functions from more risky investment banking activities.

Building societies are excluded because they are governed by legislation which requires them to raise half of all funding from customer deposits.

“Our fear is that building societies, which are constrained by their own legislation, will be competing with a group of smaller banks of a similar size which are not constrained at all,” said Adrian Coles, director-general of the Building Societies Association.

RBS, meanwhile pointed out that Northern Rock, the lender whose 2007 failure helped spark the financial crisis, had had £22.6bn of retail deposits at the end of 2006. “Our view is that ringfencing should be applied to ensure that all firms authorised to accept deposits in the UK operate on a level playing field,” RBS said.

The complaints were part of a wave of submissions to the Banking Standards Commission, which is looking at draft legislation to enact Sir John Vickers’ proposals for making UK banks safer.

Banks, lawyers and a variety of interest groups expressed views about who should be hit by the ringfence, what should be allowed inside it and also a related proposal to force bank bondholders to take losses, or “bail-in”, if another UK bank failed.

RBS, Lloyds Banking Group and Japanese investment bank Nomura joined Barclays, HSBC and Santander UK in saying they should be allowed to sell simple derivative products, such as those used to hedge interest-rate and currency fluctuations for small businesses, from within their retail banking operations.

The suggestion to separate all derivative instruments from banks’ retail businesses was one of the original proposals by the Vickers-led Independent Commission on Banking.

“Simple risk management products should be allowed to be provided alongside corporate lending relationships,” said Lloyds.

Nomura also warned that the UK needed to provide clearer definitions of how “bail-in” would work, because it was deterring investors from investing in unsecured bank debt. “The sooner the market has clarity around this issue, the more prepared investors will be to invest in bail-inable debt,” it said.

The British Bankers’ Association voiced competition concerns and worried that parts of the proposed bill will be out of tune with EU regulations including its resolution directive and plans for a different kind of ringfence.

“UK banks impacted by the measures will face significant disruption and cost in the short term and will be placed on a different footing of many of their overseas peers,” it wrote, adding “We ... view it as imperative that the UK bail-in regime sits squarely within the EU model.”

While many of the responses focused on how best to implement the ringfence, so banks and investment managers called into question the whole proposal.

RBS, which is 82 per cent owned by the government, wrote that the perception that a ringfenced entity was safe could “give rise to moral hazard and could encourage additional risk-taking behaviours”.

And investment manager Schroders warned the commission: “The short timetable and lack of wide public consultation creates the risk that flaws and loop holes are not spotted which could lead to damaging unintended consequences.”

But Hermes, another fund manager, was enthusiastic, writing that ringfencing “would not only have significant benefits in relation to financial stability but would also have advantages in terms of internal capital discipline within banks”.

Reporting by Brooke Masters, Elaine Moore, Jennifer Thompson, Daniel Schäfer, David Oakley and Adam Jones


RIVAL RULES: How UK compares on financial regulation



UK regulators have taken a particularly tough line on capital and they imposed the world’s first liquidity requirements on their banks in the wake of the financial crisis, writes Brooke Masters. Parliament is considering legislation to require UK banks to ringfence their retail operations from riskier investment banking activities and shore them up with extra capital. London has also been hit by several strong EU crackdowns, including new short selling rules, tighter rules for hedge funds and private equity, a rival ringfencing proposal and caps on pay that limit the share of bonuses that can be paid in up front cash.


Supervisors here have traditionally forced local banks to keep substantial capital stocks, and they have recently tightened rules requiring local liquidity. There are currently no proposals for limiting or separating investment banking activities from retail operations, and there has been little to no interest in limiting pay. Hong Kong, like the UK, has recently stepped up market abuse enforcement, although the volume of cases lags behind the US. Singapore, which also has high bank capital requirements has been making a big play to attract asset managers disgruntled about the new EU laws for the sector.


After the collapse of Lehman Brothers, US regulators moved quickly to force their big banks to recapitalise and they continue to exercise controls over dividend payments and share buybacks. The “Volcker rule” section of the Dodd-Frank reform act bans deposit-taking banks from trading with their own money. There has been little appetite in the US for pay caps, although it does subscribe to broad global principles saying that bonuses should be tied to risk and deferred for several years. Hedge funds have been forced to register with the Securities and Exchange Commission.

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