The Times Katherine Griffiths Banking Editor
Under plans from the Prudential Regulation Authority, banks with more than £25 billion in deposits will turn their lending division into a separate entity, away from the riskier investment unit, with its own board, capital and support services such as IT.
The rules, which will come into force in 2019, are designed to protect tax- payers from any future financial crisis. If the investment unit gets into trouble, therefore, it can be allowed to fail without putting depositors in the retail bank at risk of losing their money or providing the need for a government-backed bailout.
HSBC and Lloyds are understood to be preparing to apply for waivers to the rules, which are still being finalised by the authority.
Among the flashpoints between the banks and the PRA is a requirement that the chairman of the ring-fenced board does not already work for the group. HSBC is said to be ready to challenge the rule because it is considering trying to appoint Alan Keir, the chief executive of HSBC Bank, as chairman of its ring-fenced lender.
HSBC has already complained about the forced separation of lending operations, with Stuart Gulliver, its group chief executive, saying that the rules could be “very, very difficult” for the bank to comply with.
Lloyds is also preparing to apply for an exemption to the requirement for a separate board. The British operation, which intends to put 95 per cent of its business within the ring-fence, is likely to argue that two separate boards would be unnecessary given how small the remainder of its business would be.
The regulator has given the banks room for hope, announcing that it will take a “proportionate” approach. “You can’t go showering waivers around in disrespect of policy, but we will use waivers to achieve sensible ends,” Andrew Bailey, its chief executive, said last week.
Mr Bailey said that Lloyds’ circumstances provided a “good example” of reasons to seek a waiver, but he declined to comment on whether one would be granted.
Intended as a response to the financial crisis, when the Labour government was forced to use tens of billions of pounds of taxpayers’ money to save the system from collapse, ring-fencing has attracted controversy.
Bill Michael, head of financial services in Europe, Middle East and Africa at KPMG, said: “It is not obvious in the post-ring-fenced world that UK banks have a sustainable business model. The intellectual dogma may not be financially workable.”
One of the biggest headaches facing banks will be derivatives, Mr Michael said. All the big lenders have large derivatives books, much of which are used to help corporate customers to manage their risk over issues such as interest rate movements. Under the new rules, some simple derivatives will be allowed inside the ring-fence, but others will not. This could create a problem over how the derivative books are funded.