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Categorized | Banks, Financial

Santander set for U-turn over ringfencing plans on Brexit

Posted on November 27, 2016

Banco Santander is set to abandon plans to split its UK operations in two to comply with incoming ringfencing rules, as the Spanish bank seeks greater flexibility to shift operations out of the UK if needed because of Brexit.

The expected U-turn by Santander underlines the scale of the challenges facing the biggest British lenders as they comply with a requirement to carve up their operations while grappling with uncertainty over the UK’s exit from the EU.

Reforms proposed by Sir John Vickers four years ago — the UK’s main regulatory response to the financial crisis — force banks with more than £25bn of deposits to hive off their consumer-facing business from riskier investment banking activities by 2019.

The rule is designed to protect taxpayers from having to bail out a bank again by ensuring that vital services, such as retail deposits or payment system operations, are kept separate from risks elsewhere in the financial sector.

Santander, which has built a sizeable UK operation by acquiring Abbey National, Bradford & Bingley and Alliance & Leicester over the past decade, earlier this year, announced plans to ringfence its consumer and small business operations, while creating a new standalone bank to hold much of its corporate and investment banking operations.

However, it is now expected to announce a change in strategy in January after deciding that the likely disruption from Brexit made the complexity of creating two viable standalone banks too difficult, said two people familiar with the matter.

Instead, it is likely to put as many of its UK activities as possible into its ringfenced business while moving the small remaining rump of businesses into the London-based branch of its Spanish parent group.

That would give Santander more flexibility to shift some of its corporate and investment banking activities — particularly those dealing with cross-border clients — into the EU to handle the likely loss of the UK’s access to the bloc’s single market.

Activities that ringfenced banks are banned from carrying out include complex derivatives and operations based in crown dependencies, such as Jersey and Guernsey. At Santander, these are expected to make up about 5 per cent of assets.

“A strength for Santander is having many options due to our unique model; making sure we do what’s best for our customers is always our priority,” the bank said in an emailed statement.

“Santander is the only scale challenger to the big four banks in the UK. We are committed to supporting our customers in the UK and growing our business presence here.”

Several other banks are also expected to face an uphill struggle to split their UK businesses into two viable parts that are still able to fund themselves independently.

Analysts have raised particular concerns about the ability of Barclays and Royal Bank of Scotland to create sustainable businesses outside their ringfenced operations. Lloyds Banking Group has toyed with the idea of offloading or shutting down the relatively small part of its activities that it is not allowed to keep inside the ringfence.