The UK finance ministry is proposing legislation to relax the rules that require banks to “ring-fence” their retail arms with a capital reserve. The proposed legislation would increase the threshold at which ring-fencing applies to banks from £25 billion to £35 billion. This move is part of the government’s attempt to boost competition in the banking sector. The rule was originally introduced in 2019 to ensure the safety of deposits in the event of investment banking activities losing value. The changes aim to make the rule more adaptable, reduce unintended consequences, and promote competition in the UK banking sector.
The proposed changes also include exemptions for banks with trading assets of less than 10% of their core capital buffer and allow ring-fenced banks to set up operations abroad to compete with international and domestic banking groups. UK Finance, a banking industry body, supports the increase in the threshold and the ability for ring-fenced banks to establish entities abroad, as it believes it will enhance customer choice and competition. The government plans to introduce secondary legislation for the reforms in early 2024, with the changes taking effect after parliamentary approval.
Meanwhile, the Bank of England has published a consultation paper on a proposed rule that would require ring-fenced banks to ensure that any branch or subsidiary outside the UK does not pose a significant risk to the provision of core services in the country. These measures reflect the government’s ongoing efforts to review and adapt the ring-fencing regime, taking into account changes in the banking industry since its introduction in 2019. By making the rule more flexible and supportive of business growth, the government aims to improve outcomes for banks, customers, and the overall competitiveness of the UK banking sector.