Rachel Reeves urged to rip up ring-fencing in banking growth push
Rachel Reeves is facing renewed pressure to scrap the ring-fencing regime imposed on British banking giants in a bid to bolster the sector’s international competitiveness and bolster economic growth.
The Chancellor has been lobbied by top banking chiefs to ditch the “redundant” 15-year-old legislation, which requires major banks to separate their retail banking operations from their investment banking activities.
But Reeves has now been urged to re-think the regime by the wider financial services industry, KPMG data seen by Morning Wire reveals.
Almost two-thirds of financial services leaders have called for a ‘ring-fence 2.0’ which would adapt the current regime. Meanwhile one in five have called for the rules to be completely abolished.
Karim Haji, global and UK head of financial services at KPMG, said: “Whichever side of the argument you sit on, the industry is calling out for fresh thinking on ring-fencing.
“It’s not 2008 anymore. Everything has changed, from the state of geopolitics to the way the world does business, and the rules need to reflect that.”
A majority of leaders at 80 per cent believe overhauling the system would help drive economic growth by enabling more efficient deployment of capital.
Natwest and Lloyds to cash in
Analysts have pegged Natwest and Lloyds as the top beneficiaries of a ring-fencing overhaul.
A “blue sky” scenario estimates a sector benefit of around £2.5bn. In a base case, savings top £1.5bn, with Natwest leading the pack as the biggest beneficiary.
Natwest would receive a £530m boost, “due to the larger funding cost gap between the ring-fenced back and non-ring-fenced back,” RBC analysts Benjamin Toms, Anke Reingen and Pablo de la Torre Cuevas said.
The sector as a whole would also be set to benefit from enhanced international competitiveness in the result of a system change, KPMG data suggests.
Almost two thirds of leaders believe the regime puts UK banks at a competitive disadvantage on the global stage.
This comes as the industry faces elevated concerns over a banks’ tax raid, as Reeves scrambles to maintain her fiscal headroom.
Deputy Prime Minister Angela Rayner had proposed an annual £700m hike on the banking sector through changes to the surcharge – something lenders have already stated gives them a disadvantage in the global market.
The opponents
But changes to ring-fencing would still come with staunch opposition from within the industry.
Governor of the Bank of England Andrew Bailey defended the regime in his letter to Reform MP Richard Rice stating it “helps… because it requires for the most part UK deposits to be used to lend into the UK economy”.
The central bank boss also told MPs the removal would have a “negative effect on UK lending”.
Barclays’ chief executive, CS Venkatakrishnan, known as Venkat, broke from his banking peers to defend ring-fencing in April, after the bosses of HSBC, Santander, Lloyds and Natwest wrote to Reeves calling for her to scrap the system.
Venkat said the “immense amount of depositor protection that the ring-fencing regime gives the country” made it a net beneficiary.
The Chancellor is expected to give landmark reforms to the financial services sector in her upcoming Mansion House speech on July 15.
Banking chiefs have met with Reeves ahead of the launch of the Treasury’s inaugural financial services strategy to discuss how the industry can help drive growth.
Karim said: “The key question for Whitehall policymakers and City regulators is whether other reforms such as increased capital requirements and a more effective resolution regime, already secure financial stability by other means.”