Aligning the ring-fencing and resolution regimes: Call for Evidence

On March 2, 2023, the HM Treasury launched a so-called call for evidence on the future of the UK ring-fencing regime and on the need to align the regime with the resolution regime for banks. Specifically, in the call for evidence, the Treasury is NOT proposing any specific regulatory enhancements or changes to either of the two regimes; instead, it seeks views on whether or not the ring-fencing regime should be maintained, whether or not it has key advantages over the resolution regime, and whether or not – and how – the two regimes could be aligned with one another to make them even more effective.
To recall, the ring-fencing regime was introduced by the Financial Services (Banking Reform) Act 2013 in an effort to reduce the risks large financial institutions pose to the UK financial market, if they were to fail (too big to fail). Therefore, the Act demanded / demands that large financial institutions separate their retail banking and proprietary trading business.
On the other hand, there’s the UK resolution regime for banks which was introduced in 2009 by the Banking Act 2009 as a direct consequence of the banking crisis 2008/2009 to enhance regulatory oversight of particularly large banks and to ensure adequate resolution planning and the taking of adequate measures, if an institution was to fail. It shall be noted at this point that the resolution regime applies to any institution regardless of the fact, whether or not it is ring-fencing.
Some of the potential benefits of the ring-fencing regime as outlined in the call for evidence are the following:
– there’s a clear threshold ( £25 billion of “core deposits”) for institutions to determine whether or not they are subject to the regime;
– the post-resolution restructuring process may be less time-consuming and less costly;
– part of the operations of a failing institutions could be maintained, thereby increasing depositor and public confidence;
– separate governance arrangements for the retail banking business may help banks and building societies to specifically focus on this business segment; and
– supervisory processes can be better aligned to each „sub-division“ (e.g. implementation of different capital requirements or stress testing obligations).
The costs associated with the ring-fencing regime are summarized by the Treasury as follows:
„The ongoing costs associated with the regime in two broad categories – operational costs, and other costs that included loss of profit from reduced business
opportunities; capital, liquidity and balance sheet limitations; and collateral and hedging inefficiencies“ are somewhere in the area of £1.5 billion annually. With the increase of the threshold of the ring-fencing regime which is currently being consulted on in another consultation, these costs will be reduced accordingly. The impact of the ring-fencing regime on the competitiveness of UK banks and competition within the market was found to be negligable, so the Treasury.
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Having noted these costs and benefits, the Treasury particularly seeks feedback as to
– whether or not respondents agree with the benefits outlined above;
– whether or not there are additional benefits not outlined in the document that shall be taken into account when evaluating the future of the ring-fencing regime;
– whether or not respondents agree with the quantified costs; and
– what the overall views are of the regime and whether or not it shall be maintained or aligned thereby particularly taking into consideration issues such as financial stability, impact on firms, or growth and competition of market participants.