The Government’s new changes to the ring-fencing regime in the Financial Services and Markets Bill could give British banks greater flexibility to expand lending capacity and deploy capital, particularly towards SMEs and trade finance.
While the changes outlined to the regime are unlikely to have an immediate impact, they signal a broader shift in how policy makers and regulators are thinking about financial regulation, growth and competitiveness.
The regime requires banks with holdings exceeding £35 billion to separate retail and investment activities, something major UK high street banks have been lobbying against for a year. The Government hopes loosening the rules will free up capital to support their growth strategy.
The reforms build on the Government’s Skeoch Review and the “smarter ring-fencing consultation”. They will give the Prudential Regulation Authority (PRA) greater flexibility to decide how the rules should operate rather than relying on secondary legislation, including restrictions on what activities can occur within the regime. The changes will also mean the PRA no longer needs to create duplicate ring-fencing rules where existing regulation already achieves the same outcome.
While the reforms don’t directly free up capital restricted by the regime, they give the PRA more flexibility to relax certain ring-fencing requirements over time, which may create additional capacity for institutional banks to support additional lending.
The Government will also consult later this year on introducing a “New Growth Allowance” for ring-fenced banks. Under the proposal, banks would be allowed to undertake certain currently restricted activities up to an allowance worth 10% of Pillar 1 risk-weighted assets for credit risk. HM Treasury says this could unlock up to £80 billion in additional financing for UK businesses.
The changes highlight a major issue facing the Government: how to maintain financial stability while competing more aggressively for growth. Critics will argue that loosening the ring-fencing regime will expose the banking sector to systemic risk, particularly while private credit markets, which lend to SMEs, are experiencing volatility. For instance, the Financial Times reported that HSBC has taken a $400 million loss linked to its exposure to an Apollo-backed private credit fund.
However, supporters will argue the changes adopt a targeted approach over blanket measures that are supportive of “productive finance” while preserving the core separation between retail banking and riskier investment activity.
What will matter going forward is how the changes are implemented by the PRA and how regulators and policy makers achieve the balance between growth and stability within financial markets.
These debates will continue as the Bill has its Second Reading in the Lords on Monday 8 June, with its Committee Stage debates starting on Monday 22 June.
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