The chief executive of Barclays has launched a staunch defence of Britain’s bank ring-fencing regime even as his main rivals lobby the government to abolish it less than a decade after its introduction.
Speaking exclusively to Sky News, CS Venkatakrishnan said the protection that ring-fencing provided to bank depositors outweighed the costs of implementing and administering the system.
His defence of ring-fencing – introduced as part of Britain’s response to the 2008 financial crisis – pits Mr Venkatakrishnan firmly against the bosses of HSBC Holdings, Lloyds Banking Group, NatWest Group and Santander UK, who wrote to Rachel Reeves, the chancellor, last week to warn that the regulatory framework was inhibiting lenders’ ability to help drive UK economic growth.
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“The point that the other banks make about a bit of friction, trapped capital and administrative costs are correct,” Mr Venkatakrishnan said.
“However, there are two counterpoints: we have spent the money on the set-up and we make it work; but the more important fact is that you have to weigh against this the immense amount of depositor protection that the ring-fencing regime gives the country.
“The ring-fencing regime is a very good one and a very strong one.
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“Depositor protection is the single-most important element of the banking system and the single-most important part of banks’ engagement with society.
“I don’t think ring-fencing should be relaxed or scrapped.”
The ring-fencing regime establishes a ‘firewall’ between banking groups’ retail arms and their investment banking operations, protecting either if the other were to run into serious financial difficulties.
Barclays’ decision not to sign the joint letter from the CEOs of the biggest UK banks surprised some of his peers at a time when the chancellor is spearheading a push to slash red tape across the economy.
On Wednesday, Barclays unveiled first-quarter results showing a better-than-expected revenue performance in its investment banking division.
The bank said group profit before tax rose 19% year-on-year to £2.7bn.
Earlier this week, the HSBC chief executive Georges Elhedery confirmed that he was backing the push to scrap ring-fencing.
In their joint letter, 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.
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Sam Woods, the current chief executive of the main banking regulator, the Prudential Regulation Authority, was involved in formulating proposals published by the Sir John Vickers-led Independent Commission on Banking in 2011.
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.
The chancellor has repeatedly spoken of the need to regulate for growth rather than risk – a phrase the four banks hope will now persuade her to abandon ring-fencing.
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”.
