Investments: Ring-Fencing Questioned



Ring-Fencing Challenged

Ring-Fencing Challenged

The UK’s bank chief executives have queried the benefits of the ring-fencing proposed earlier in the year, which will keep retail and investment areas of the banks separate. They said that ring-fencing would mean higher costs to banks and would disadvantage them. However, the banks did say that taxpayers should not have to pay for any bank going under in future.

Prevention

The ring-fencing was passed on as a way to insure against another banking crisis and was recommended as part of a report from the Independent Commission on Banking (ICB). The government has not put these recommendations into place yet but bank chiefs said that the issue had been confirmed, calling it a “done deal”.

In addition, the report recommended more money in reserves to hold as a cushion, with banks heads of Barclays, HSBC, Lloyds, RBS, and Santander saying that they would begin this move right away, and that it was likely to be implemented worldwide, while ring-fencing was not.

Short-Term Damage

While banks admitted that better capitalization would draw in custom in future, it would damage bank holdings in the short-term. The ICB estimated that the cost to the banking industry would be between £4 billion and £7 billion. Banks challenged this, saying costs could be higher and it was too early to put a number on the idea. Chairman of HSBC, Douglas Flint, said about funds for businesses, “Ring-fencing won’t impact the availability of funds but it will impact the cost.”

Chief executive of Santander, Ana Botin, said that higher costs could mean small and medium-sized business customers could lose certain services. In addition, other banks might use lower returns for shareholders or passing on costs to customers in various ways to get out of the issue.

Chief executive of Barclays, Bob Diamond, argued that investment banking was not more of a risk than the retail divisions, citing Northern Rock and Bradford & Bingley, which both failed due to a loss of lending, which could happen due to the ring-fencing. Chief executive of RBS, Stephen Hester agreed, saying that RBS had lost more on standard lending than on investments.

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