The Finance Ministry of Britain has proposed legislation to relax rules that require banks to “ring-fence” their retail operations with a capital reserve. The proposed legislation aims to increase the threshold at which ring-fencing applies from £25 billion to £35 billion. The government believes that the appropriate deposit level has increased since the rule was first determined. The changes are said to make the rule more adaptable and reduce the risk of unintended consequences.
The ring-fencing rule was introduced in January 2019 following the costly taxpayer bail-outs of banks during the global financial crisis. Its purpose is to ensure that deposits remain safe in the event of risky investment banking activities causing losses. The proposed changes would also allow ring-fenced banks to establish entities outside of Britain to compete with international and domestic banking groups. The threshold increase and the ability to open operations abroad are expected to enhance customer choice and improve competition.
The government plans to present the secondary legislation for implementing the reforms in early 2024, with the changes being enacted once they clear parliament. The Bank of England also published a consultation paper on proposals for a rule requiring ring-fenced banks to ensure that any branch or subsidiary outside of Britain does not pose a significant risk to the provision of core services in the UK. The banking industry body, UK Finance, supports the proposed changes but urges the government to review the long-term necessity of the ring-fencing regime, considering the significant changes to bank resolvability since its introduction in 2019.