Huw Jones

LONDON, (Reuters) – Rules requiring banks in Britain to provide capital for their retail businesses should not be changed for now. However, they may “ossify the sector” over the long-term if the independent review by the ministry of finance found on Tuesday.

To protect bank deposits over 25 million pounds (32.6 billion dollars) and prevent any financial losses from separate investments banking activities, the “ring fencing” rules were established. They are a lesson learned from the financial crisis that saw taxpayers bail out many banks.

These rules were requested by banks, which included HSBC. Barclays (LON :), Lloyds, (LON 🙂 and NatWest will be removed as they pose a threat to competitiveness.

Keith Skeoch was the chair of this review. The rules improved retail banking’s resilience, but they must be easier to use by simpler lenders.

According to the review, although the threshold of 25-billion pounds should be retained, its application could have been made more flexible in order for banks with less complex operations to be exempted from ring-fencing even if their deposits exceed this level.

The review stated that “Ring-fencing” had not yet been a major driver of banking competition or competitiveness.

“In the long-term, retail banking in UK is at risk of becoming too focused on the opportunities and risks in the past rather than adapting to the new risks and opportunities in the future.”

As separate rules become available for dismantling bank failings and moving funds to another lender, the benefits of ring fencing will diminish.

Reviewers will feel more at ease with the effectiveness of resolution rules, and this will lead to confidence in retail continuity without the need for ring fencing, according to the review.

Skeoch wrote in the review’s preface that the main recommendation “would change the regime’s scope over the longer-term, giving the authorities more flexibility to take out banks from the ringfencing regime that they deem to be insolvable.”

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