The UK Government has announced plans to ringfence retail banks from their investment banking arms. The obvious first ones that come to mind and which would severely be impacted would be HSBC, Barclays and RBS. We should wait and see how the banks respond to these plans, however these do not have to be fully implemented by 2019. Long way to go!
Proposed by the independent commission on banks set by the UK treasury some of the salient features as I understand are as follows:
- all retail operations to be ring-fenced into a separate unit and quite possibly within separate subsidiaries
- the ring fencing would have the option to include big corporates
- trading in high risk products and financial instruments would be outside the ring fenced operations (that was going to be obvious!)
- the ring fenced operations of the retail side will have their own Boards and will have to maintain a minimum 10pc capital
- lending to the investment banking division would only be in a similar manner as to any other banks on an arms length basis and such that the capital resources do not fall below the 10pc level
- loss absorbing capacity for all big banks between 17 to 20pc of risk weighted assets (this could be a significant one!)
In my view whilst all banks would achieve the requird implementation level by 2019 the costs of achieving so would rise significantly impacting the profitability of these banks. Secondly the investment banking divisions would have less cash for their own operations and would therefore have to rely more on borrowed funding pushing the funding costs higher and thus impacting profitability.
More updates to follow!
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