Rachel Reeves, the chancellor, has told bank bosses she is “open-minded” about reforming the industry’s ring-fencing regime amid a concerted push to abolish the most significant regulatory burden introduced after the financial crisis.
Sky News has seen a letter sent last week by Ms Reeves to the chief executives of a quartet of Britain’s biggest banks, in which she acknowledges their view that adjustments to ring-fencing – which creates a firewall between groups’ investment banking and retail operations – “have not gone far enough”.
“As I have said previously, I am open-minded about the case for further reform,” the chancellor told the CEOs of HSBC Holdings, Lloyds Banking Group, NatWest Group and Santander UK.
“My officials are considering the issues you have raised and they will reach out to your teams to discuss further.
“Banking is at the heart of the UK’s financial services sector and plays a vital role in supporting growth across the UK economy and will be crucial to the success of the government’s industrial strategy.
“If we want the UK to grow, we need a thriving banking sector and creating the right environment for that is a top priority for me.”
While Ms Reeves’s response to the bankers stops short of explicitly signalling a willingness to abolish ring-fencing, industry sources believe the Treasury now recognises that there is a clear case for an overhaul of a system which cost billions of pounds to set up.
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Of the five banks subject to ring-fencing, only Barclays has openly argued in favour of its retention, with its rivals all arguing that the regime creates capital inefficiencies which inhibit lending into the British economy.
The chancellor’s letter comes amid a push by her – along with the prime minister and business secretary – to amend the remits of economic regulators to give them explicit growth objectives.
In recent months, the Payment Systems Regulator has been scrapped and folded into the City watchdog, while the chairman of the Competition and Markets Authority has been ousted amid concerns in Whitehall that it was not sufficiently focused on growth.
Ms Reeves told the bank chiefs in her letter that the Treasury was prioritising “new growth-focused remits for the regulators and a commitment to look at how post-crisis regulation can be rebalanced to ensure it is proportionate and managing rather than eliminating risk”.
Her response will fuel expectations that the chancellor will use her speech at July’s Mansion House dinner to outline prospective reforms to ring-fencing.
Last week, analysts at Royal Bank of Canada said that scrapping ring-fencing would deliver a benefit to the affected banks of as much as £2.5bn, by reducing funding costs in their wholesale banking operations.
NatWest, said RBC, would be the single biggest beneficiary of such a shake-up.
The push for reform comes at precisely the same time as another financially and symbolically important legacy of Britain’s banking crisis is set to disappear.
The government’s stake in NatWest is now below 1%, according to a filing last week, having stood at more than 80% after the bank’s £45.5bn bailout.
The sale of the remaining stake is likely as soon as next week based on the current trajectory of share sales.
In their joint letter to Ms Reeves, which was revealed exclusively last month by Sky News, the quartet of bank chiefs told Ms Reeves that: “With global economic headwinds, it is crucial that, in support of its Industrial Strategy, the government’s Financial Services Growth and Competitiveness Strategy removes unnecessary constraints on the ability of UK banks to support businesses across the economy and sends the clearest possible signal to investors in the UK of your commitment to reform.
“While we welcomed the recent technical adjustments to the ring-fencing regime, we believe it is now imperative to go further.
“Removing the ring-fencing regime is, we believe, among the most significant steps the government could take to ensure the prudential framework maximises the banking sector’s ability to support UK businesses and promote economic growth.”
Banks spent billions of pounds designing and setting up their ring-fenced entities, with separate boards of directors appointed to each division.
More recently, the Treasury has moved to increase the deposit threshold from £25bn to £35bn, amid pressure from a number of faster-growing banks.
Sam Woods, the current chief executive of the UK banking regulator, the Prudential Regulation Authority, was involved in formulating proposals published by the Sir John Vickers-led Independent Commission on Banking in 2011.
Last week, Sky News revealed that the Treasury is drawing up plans to recruit a successor to Mr Woods when his second term ends next year.
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Legislation to establish ring-fencing was passed in the Financial Services Reform (Banking) Act 2013, and the regime came into effect in 2019.
In addition to ring-fencing, banks were forced to substantially increase the amount and quality of capital they held as a risk buffer, while they were also instructed to create so-called ‘living wills’ in the event that they ran into financial trouble.
Britain is the only major economy to have adopted such an approach to regulating its banking industry – a fact which the bank chiefs say is now undermining UK competitiveness.
“Ring-fencing imposes significant and often overlooked costs on businesses, including SMEs, by exposing them to banking constraints not experienced by their international competitors, making it harder for them to scale and compete,” the letter said.
The four bosses called on Ms Reeves to use this summer’s Mansion House dinner – the City’s annual set-piece event – to deliver “a clear statement of intent…to abolish ring-fencing during this Parliament”.
Doing so, they argued, would “demonstrate the government’s determination to do what it takes to promote growth and send the strongest possible signal to investors of your commitment to the City and to strengthen the UK’s position as a leading international financial centre”.
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The Treasury has been contacted for comment on Ms Reeves’s letter.
