The Bank of England is preparing this week to scrutinise plans by major banks to insulate their high street operations from riskier investment banking activities.
In the latest attempt by policymakers to reduce the need for taxpayer bailouts, banks have been instructed to present their proposals to the Bank by Tuesday – expected to be submissions running to hundreds of pages of documents.
Major banks face having to overhaul the way they run their operations in order to convince the Bank they can protect consumers if their businesses run into trouble. Many will likely be required to create a holding company as well as distinct ringfenced and non-ringfenced entities, each with its own board of directors.
No more than one-third of the members of a ringfenced bank’s board may be current employees or directors of another entity in the group – which may present challenges, given the new regime is being introduced to make bankers more responsible for their actions.
Ringfencing the high street from investment banking was recommended by the independent Vickers commission, which was set up in the first year of the coalition government. While banks have a deadline of 1 January 2019 to comply with the rules, Threadneedle Street is demanding evidence that work is under way to protect consumers from the collapse of an investment bank.
The requirements could force banks to significantly scale back their investment banking arms and embark on fresh reviews of their strategies. The ratings agency Standard & Poor’s has already warned that this could lead to an increase in the costs for consumers, as banks try to pass on the expenses associated with both restructuring and the restrictions on moving resources around their operations.
The lenders have known since the autumn that they need to submit their plans by Tuesday – a deadline that largely affects HSBC, Barclays, Santander’s UK arm and the Co-operative Bank as well as the bailed-out Lloyds Banking Group and Royal Bank of Scotland.
But any bank with deposits of £25bn or more by 2019 could also be expected to submit plans. This has implications for: TSB, which is in the process of being spun out of Lloyds; Williams & Glyn, which is being spun out of RBS; and Virgin Money, the recently floated banking business backed by Sir Richard Branson.
Omar Ali, UK head of banking and capital markets at EY, said the timeline for the changes was ambitious given the scale of structural reform that could be forced upon the banks. “The discussions that take place in the first half of this year based on the initial plans will be critical to the future shape of the industry,” he said. “Many are likely to ask for waivers given the short timeframes for submitting their plans.”
When it published its thoughts on ringfenced banks in October, the Bank of England said the submitted plans “would ideally include provisional UK holding company and UK regulated entity balance sheets and profit and loss statements, enabling supervisors to assess the viability and sustainability of the entities and their level of going and gone-concern capitalisation”. A further consultation will take place this year on how much capital each of the entities should be required to hold – one of the key issues that bankers want to know in making their preparations.
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