Bank of England governor defends UK ringfencing rules for lenders

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Andrew Bailey, Bank of England governor, has defended the ringfencing rules that force UK lenders to separate their retail operations from other activities, warning that scrapping them would make mortgages and other loans more expensive.

Bailey told the influential House of Commons Treasury committee in a letter that bank bosses were wrong to argue that ringfencing hampered their ability to lend to UK households and smaller businesses.

“Removing the ringfence would most likely have a negative effect on UK lending, both in terms of cost and quantities, with banks directing funding from retail deposits away from UK households and small and medium-sized enterprises and towards investment banking activities or activities outside the UK,” he said in the letter, which was published on Tuesday and sent last week.

The regulations came into force in 2019 and were introduced to avoid a repeat of the taxpayer bailouts of failing lenders that followed the 2008-09 financial crisis. Bank executives have stepped up pressure on the government to wind back the more onerous parts of the scheme.

Bailey rejected criticism by the industry, saying the rules had lowered the cost of capital for UK banks by making them seem safer to investors. This had in turn allowed lenders to provide mortgages and other loans at lower rates than they otherwise would have, he added.

The BoE governor pointed to earlier research by the central bank’s Financial Policy Committee estimating the rules had lowered the “optimal capital levels” for UK banks by 5 percentage points from where they otherwise would be.

UK banks had capital worth 15.9 per cent of their assets adjusted for riskiness at the end of December.

“Without any separation between retail deposits of UK households and SMEs and the global trading activity hosted in the UK, we would need to adopt a more restrictive approach to overseeing the international businesses that make up such a large part of the UK financial centre in order to protect domestic lending from global risks,” Bailey said.

The Financial Times recently reported that the BoE’s Prudential Regulation Authority, which supervises UK banks, is examining ways to ease ringfencing rules without removing the core protection they provide for retail deposits.

One option under consideration is to allow a ringfenced bank to rely on the rest of the group for more of its back-office services.

The debate about ringfencing is intensifying ahead of chancellor Rachel Reeves’ Mansion House speech in July, when she plans to present City executives with a new strategy for boosting growth and competitiveness in British financial services.

The heads of four of Britain’s biggest banks — HSBC, Lloyds Banking Group, NatWest and Santander UK — last month called on Reeves to scrap the ringfence as part of the new plans.

“Removing the ringfencing regime is, we believe, among the most significant steps the government could take to ensure the prudential framework maximises the banking sector’s ability to support UK businesses and promote economic growth,” their letter said.

The push to remove the ringfence is not universally supported. Barclays chief executive CS Venkatakrishnan refused to sign the letter and said last month: “Ringfencing helps protect depositors by segregating the liabilities and the assets and makes it easier to make depositors whole. I go on the side of depositor protection.”

The ringfencing regime aims to structurally protect deposits from retail consumers and small businesses by requiring big British banks to separate them inside legal entities with higher levels of capital and restricted activities.

The rules prevent banks using money from British retail depositors to fund complex and risky activities, such as financing hedge funds, trading in complex derivatives or lending to companies in countries such as China.