Retail units of UK banks to be ring-fenced under reforms

GLOBAL BANKING regulation took a step towards convergence after a British commission proposed measures that will bring the country’s financial rules closer to the US, reducing fears that British lenders will flee London for New York.

The Independent Banking Commission, led by Sir John Vickers, stopped short of forcing banks to split their securities businesses from their retail and commercial lending operations – a radical plan that had been bitterly opposed by the industry.

Bankers reacted with relief at the commission’s proposal that UK lenders instead place their retail operations – deposits, small business lending and payment systems – into a separate subsidiary and hold more capital against it than currently required.

The moves are aimed at ensuring that retail units can keep functioning even if the investment and commercial banking businesses suffer large losses, as in the financial crisis.

Barclays, HSBC and Royal Bank of Scotland had feared a recommendation formally separating investment and retail banking operations or restricting their share of the high-street market.

Santander UK, the Spanish bank seeking to increase its current account base, is among those poised to benefit from greater competition.

The proposed changes – which have to be finalised by September – are similar to regulations in the US, where banks are limited in the amount of deposits they can use for investment banking and commercial banking activities.

“The proposals echo the structure which has been in place in the US for the last decade, which require commercial banking to be separated from other financial activities,” wrote Simon Gleeson, a partner at Clifford Chance.

However, the UK plan goes further than the US, where banks do not face the same capital requirements for their retail units.

The Vickers recommendations would also require British lenders to hold 10 per cent of core tier one capital in their retail business, more than the 7 per cent envisaged by the Basel III agreement.

Nevertheless, bankers and analysts said the commission’s recommendations would not trigger the exodus of lenders and bankers from the City of London that had been threatened by some executives in the run-up to the report.

National regulators have striven to achieve greater co-ordination in how rules are written and implemented in order to crack down on “regulatory arbitrage” by large banks.