Ring-fencing row puts Reeves in midst of Bank of England and City
Rachel Reeves has found herself in the crosshairs of City chiefs and the Bank of England as she weighs whether to scrap ring-fencing rules.
The Chancellor is facing pressure to rip up the rules imposed on British lenders after top banking chiefs branded the system “redundant”.
Reeves said she is “open-minded” to ditching the 15-year-old legislation in a letter obtained by Sky News, and officials were “considering the issues”.
But any shake-up of the system faces opposition from the Bank of England.
Andrew Bailey, the central bank’s governor, said the removal of ring-fencing would have a “negative effect on UK lending” due to funds being directed away from retail to investment or activities outside the UK.
Bailey renewed his defence of the system on Monday, in a letter to Reform MP Richard Tice, where he said ring-fencing “helps… because it requires for the most part UK deposits to be used to lend into the UK economy”.
Banking analyst John Cronin, founder of Seapoint Insights, told Morning Wire: “Clearly Reeves is caught between a rock and a hard place here – with the Bank of England defending the regime and the industry lobbying for change.”
Reeves has faced pressure to loosen regulations amid the government’s mission to drive economic growth and has wooed top financial services firms through a series of summits this year.
Banking chiefs have weighed in on the Chancellor’s ambitions and were included in growth talks earlier this year.
The bosses of HSBC, Lloyds, Natwest and Santander used the deregulation push to voice concerns on ring-fencing.
In a joint letter to Reeves, they described the regime as “a drag on banks’ ability to support business and the economy”.
William Chalmers, Lloyds’ chief financial officer, said the debate on the ring-facing regime imposed on banks was an “important” topic amidst the “commitment that we all have to ensure that the UK gets back onto a growth trajectory.”
Who benefits from a ring-fencing rip up?
Ring-fencing requires major banks to separate their retail banking operations from their investment banking activities. It was introduced in the wake of the financial crisis to ensure stability and was mandated in the Financial Services Act 2013.
The threshold to be ring-fenced was raised to £35bn, from £25bn previously, in October 2024 by ex-City Minister Tulip Siddiq.
“The reforms will improve competition and competitiveness in the UK banking sector and support economic growth,” Siddiq said at the time.
Analysis from RBC projects Natwest and Lloyds would rake in hundreds of millions from a pivot.
Around £160bn in excess liquidity “is currently sitting in UK ring-fenced banks,” according to analysts Benjamin Toms, Anke Reingen and Pablo de la Torre Cuevas.
Of the ring-fenced banks, Natwest is most primed to benefit from a shake up, “due to the larger funding cost gap” between operations.
The banking juggernaut could save £530m – which marks seven per cent of its profit before tax.
Lloyds could be set for a £480m saving, six per cent of its pre-tax profit.
Meanwhile, HSBC and Barclays would “benefit, but to a lesser degree,” analysts said, with the former booking £240m and the latter £300m.
Deregulation
The Treasury will publish its Financial Services Growth and Competitiveness Strategy on July 15, which is being eyed across industries for milestone announcements.
The Chancellor may choose to debut a ring-fencing change in the new strategy, in which the government has promised to create “the world’s most innovative, full service financial centre”.
Reeves met bank bosses in February for talks designed to feed into the upcoming growth policy.
Cronin said: “I suspect the Chancellor will work towards a middle ground – that is, a significant watering down of the rules rather than complete abolition.”
Barclays’ chief executive, CS Venkatakrishnan, known as Venkat, broke from his banking peers earlier this year after launching a staunch defence of ring-fencing.
Venkat argued that whilst the points on “a bit of friction, trapped capital and the administrative costs are correct”, there are net benefits.
“There are two counterpoints: we have spent the money on the set-up and we make it work; but the more important fact is that you have to weigh against this the immense amount of depositor protection that the ring-fencing regime gives the country,” he said.
Faced with the lobbying calls, Reeves may be destined for a compromise, as opposed to a full repeal.
Deregulation has been at the heart of Labour’s rhetoric, whether they choose to meet the lender’s wishes on that front could manifest as softer reform, as opposed to all-out revolution.