Banks may need to bolster balance sheets

United Kingdom regulator Thursday held firm on a law to force banks to segregate their retail and investment banking operations, setting the stage for more painful restructuring at British lenders.

The Bank of England is pressing on with plans to ensure banks’ day-to-day business of running personal and small firms’ bank accounts is safe from riskier investment banking type activities, and to ensure the former continue in a crisis.

Britain’s big banks will need to hold billions of pounds of extra capital when they have to separate their domestic high street banking operations from risky areas, the Bank of England said on Thursday.

It follows the mammoth banking bailouts in the 2008 financial crisis and will affect all major lenders with a balance sheet of more than £25bn – Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander United Kingdom and the Co-operative Bank.

But Andrew Bailey, deputy governor of the bank and chief executive of the PRA, said the reforms would be key to making the banking sector stronger in the face of future crises.

The BOE’s Prudential Regulation Authority estimates that so-called ring-fencing could mean an additional capital requirement of 2.2 billion pounds ($3.4 billion) to 3.3 billion pounds by 2019, when the rules kick in.

For a big bank, this could be equivalent to a one-off cost of £200 million and an annual cost of £120 million.

The change is seen as part of Chancellor George Osborne’s “new settlement” with financial services companies, viewed by a few as a call for an end to banker bashing.

The amount of extra capital banks will need is also likely to rise as ring-fenced units will also be told to hold an extra “systemic risk” buffer, which will be set by another arm of the BoE, its Financial Policy Committee, by the end of May.

A ring-fenced retail bank will be able to share its back office functions with its investment arm but it must be managed independently.

While the PRA said banks may try to pass on higher costs to customers, this will depend on other factors, including competition and new entrants to the banking market.

More positively for the banks, the PRA said the ring-fenced units would be allowed to pay dividends to their parent company. “We have provided clarity for affected banks on how we will implement ringfencing and this will enable firms to take substantial steps forward in their preparations for structural reform”.

The ringfencing proposals came just hours after a spat between regulators and the Treasury which last night overturned plans that would have made senior bankers “guilty until proven innocent”.

The aggregate sum outlined by the PRA will not necessarily mean that the banks are required to raise capital externally, sources indicated. They will have to wait until next year for more clarity on this area.