Rachel Reeves, the Chancellor, has indicated to leading bank executives that she is “open-minded” about abandoning the ring-fencing regime imposed on major banks.
Last month, the heads of HSBC, Lloyds, Natwest and Santander lobbied the Chancellor to abolish the 15 year old legislation, as reported by City AM.
The lenders criticised the system, which mandates firms to separate their retail banking operations from their investment banking, as “redundant” and a hindrance to the firm’s “ability to support business and the economy” in a letter sent to Reeves in April.
Reeves has since responded: “Officials are considering the issues” and suggested further discussions.
In a letter obtained by Sky News, Reeves wrote: “Banking is at the heart of the UK’s financial services sector and plays a vital role in supporting growth across the UK economy and will be crucial to the success of the government’s industrial strategy.”
City AM reported last week that Natwest and Lloyds could receive a significant financial boost if Reeves were to meet the lenders’ demands.
RBC analysts have projected a “blue sky” scenario that would see the banking sector benefit by around £2.5bn. In a base case, savings exceed £1.5bn, with Natwest emerging as the biggest beneficiary.
Natwest could see a £530m boost, “due to the larger funding cost gap between the ring-fenced back and non-ring-fenced back”, according to analysts Benjamin Toms, Anke Reingen and Pablo de la Torre Cuevas.
This figure represents seven per cent of Natwest’s projected pre-tax profit for 2026.
Analysts have stated that HSBC and Barclays would “benefit, but to a lesser degree.”
Barclays could save £240m and HSBC £300m.
Barclays’ boss: Ring-fencing should not be scrapped
However, in contrast to his FTSE 100 counterparts, Barclays boss CS Venkatakrishnan staunchly defended ring-fencing in April.
The bank’s chief doesn’t believe the regulation “should be relaxed or scrapped.”
He argued: “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.”
This regime originated from the financial crisis, where regulators saw the need to separate a bank’s everyday services, like taking deposits and offering loans, from its riskier investment activities, such as trading.
It was mandated in the Financial Services Act 2013 and created a legal ‘firewall’ around retail banking to ensure savings and access to banking services were protected if other parts of the lender failed.
UK banks with more than £25bn in core deposits are required to ring-fence their retail operations from riskier activities.
