How to ring-fence a TBTF | FT Alphaville

How to ring-fence a TBTF

How – and how much does it cost – to ring-fence the retail banking operations of systematically important, or Too-Big-to-Fail UK banks?

Well, here’s what it might look like.

From the interim report of the Independent Commission on Banking:

And here’s what’s being proposed.

The Commission is therefore considering forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group. This would require universal banks to maintain minimum capital ratios and loss-absorbing debt (as indicated above) for their UK retail banking operations, as well as for their businesses as a whole. Subject to that, the banks could transfer capital between their UK retail and other banking activities.

In other words both bits of the bank would be required to maintain 10 per cent equity capital but the bank would have the freedom to shift capital between different parts of the business as long as that threshold is met.

For illustrative purposes only, the retail ring-fence might require rules such as:

•if a subsidiary seeks a licence from the regulator to conduct retail deposit-taking, that subsidiary can only conduct activities which are permitted to take place in a retail ring-fence. The subsidiary must meet all regulatory requirements on a standalone basis;

under no circumstances can the parent company transfer capital out of the retail entity if it would result in a drop below the minimum regulatory capital ratio prescribed;

•the retail subsidiary cannot own equity in other parts of the group;

•intragroup exposures by, or guarantees from, the retail subsidiary will be treated as third party exposures for regulatory purposes. Cross-defaults between the retail subsidiary and the rest of the group may also need to be limited;

•the retail subsidiary must have access to operational services which will continue in the event of insolvency of the rest of the group; and/or

•the retail subsidiary and the rest of the group must enter into separate master netting agreements.

As for the costs, the IBC says talk of £12bn-15bn is rubbish.

The Commission has received a wide range of estimates of these costs, including from the banks themselves on a confidential basis. One number which has been reported publicly placed the cost at £12-15bn per year for affected UK banks. This estimate is higher than those received from the banks themselves and a number of factors suggest that the actual costs of a ring-fence are likely to be smaller still. In particular, most estimates assume that diversification benefits are lost and that the costs are largely the same as for complete separation. In addition, some estimates include costs which will be incurred by banks in order to meet new regulatory requirements and so do not represent the incremental cost of a ring-fence.


Any guesses who might have put that figure into the public domain?

FWIW, the FT put the costs of ring-fencing at £5bn.

While bankers expect those reforms to cost as much as £5bn in extra funding and capital costs, ring-fencing is a far less expensive option than a wholesale break-up, or forcing banks such as Barclays to separately capitalise its sprawling investment banking operations.

Related links:
Lloyds lags behind after ICB report – FT Alphaville
Vickers urges banks to protect deposits – FT