Banks have warned regulators that Britain’s exit from the EU could undermine work they are doing to hive off their retail banking operations from more risky investment banking activities.
Executives at several banks, including Royal Bank of Scotland and Lloyds Banking Group, have asked regulators at the Bank of England for clarification on the potential fallout from Brexit for their ringfencing plans.
Both the Treasury and the BoE’s Prudential Regulation Authority — under its new chief Sam Woods — have rejected any delay in the deadline for ringfencing from the end of 2018. But one official admitted that the banks were raising a genuine concern. Another official said it was too early to give any guidance.
The banks’ worry stems from the fact that the UK ringfencing law allows deposits, assets and entities from other European Economic Area (EEA) countries to be included inside a bank’s ringfenced entity.
If the UK leaves the trading bloc then banks fear it may trigger a change in the law to prevent EEA operations from being included inside the ringfence, forcing the new structures to be unwound and reassembled.
Executives at several of the banks warned that this would be very costly and time-consuming for them and disruptive for any clients that have to move. One executive said banks may prefer to sell the assets rather than attempt to move them.
Another banker said the timetables of ringfencing and Brexit were not aligned, which meant the banks may need to have their new sliced-up structures in place before the UK negotiations to leave the EU are finalised.
Any guidance for the banks is expected to be drawn up after consultation between the PRA and the Treasury, which is responsible for overseeing the impact of Brexit on the financial sector.
Under reforms first proposed by Sir John Vickers five years ago in response to the financial crisis, banks with more than £25bn of UK deposits must carve out their core retail banking operations into an entity separated from the rest of their activities.
It is the biggest structural reform ever imposed on UK banks and it is already forecast to cost the industry billions of pounds to hit the deadline of January 2019. Barclays said on Friday it aimed to complete the creation of its ringfenced unit over the Easter weekend of 2018.
The rule is designed to protect taxpayers from having to bail out a bank again by ensuring that services such as retail deposits or payment system operations are kept separate from risks elsewhere in the financial sector.
Some banks, such as Lloyds and RBS, have opted to include as much as possible inside the ringfence, which means they could be most affected by Brexit. Others, such as Barclays, HSBC and Santander, do not seem as worried by the issue because their EEA activities are mostly held outside the ringfence.
RBS plans to include Ulster Bank, its Irish operation, inside its ringfence along with many of its smaller operations in other EEA countries, such as the Netherlands, France, Spain, Germany and Sweden.
Lloyds has a Dutch mortgage branch with about £8bn of loans and a German online bank that has about £12bn of customer deposits, both of which it plans to keep inside its ringfence. Lloyds aims to have 95 per cent of its total assets inside the ringfence.
Lloyds, RBS, Barclays, HSBC, the PRA and the Treasury declined to comment.