Enforcing a rigid ringfence around UK banking activities risks creating a swathe of unintended consequences including further closures of high street branches and even the end of ‘free’ banking.

This report argues that if the ringfenced banks are restricted in their range of products and services as currently envisaged, and if High Net Worth individuals take their business abroad, revenue bases will be further eroded. Inevitably this mix of much higher costs and lower revenues will be passed on to individuals and SMEs, those who are not allowed to bank outside of the ringfence, resulting in a fundamental change to the way banks structure their charges.

It is critical of the Independent Commission on Banking’s (ICB) decision to even introduce a ringfence, arguing that such a tool would not have prevented the majority of banks and building societies from going bust following the financial crash. During the crisis, UK banks of all sizes failed, regardless of whether they had investment bank businesses or not. Among the long list of other failures in UK, including HBOS, Northern Rock, Bradford and Bingley and most recently the Co-Op bank, not one of them had any investment banking activity of note.

The report argues that a ringfence might have saved RBS because it probably would have prevented the ABN AMRO acquisition but it would not, on its own, have stopped its lending losses. The new capital rules would have been much more effective in that regard and would also almost certainly have stopped the acquisition as well since RBS would have been in breach of the minimum capital ratios and the new liquidity coverage requirements under Basel III.

It also notes the historical ineffectiveness of similar approaches to the legal separation of banking activities in the US in the 1930s and in post-war Japan in the 1940s.

However, the paper notes that “too much political capital has been invested in promoting a UK ringfence for the government now to abandon its legislation.” Instead it sets out a number of recommendations to ensure that UK banks remain competitive and are in a position to be able to lend to businesses and consumers.

Recommendations include:

• Make any ringfence as flexible as possible so that it can be suitably aligned in the future with the impending EU legislation.  In addition, more flexible provisions will permit a better phased, lower cost and lower risk migration to any new legal entity structure.
• Any automatic break up (electrification) provisions should only be able to be used in extremis.  A wide array of regulatory tools is already available to discipline firms and individuals that act improperly and the EU is already planning to hand regulators the powers “to require a structural reorganization” of a bank, if needed to ensure it can be wound down if it fails.
• Allow the upstreamed deposits from the crown dependencies to ringfenced banks to be treated as if they were raised by ringfenced banks in UK or EEA. Without this the UK ringfenced banks risk being denied a sizeable source of funding.
• Permit ringfenced banks to offer non linear derivatives, structured deposits and a full range of trade finance services to their customer base within overall risk limits. This will ensure that retail and SME customers will not be disadvantaged by the introduction of the ringfence.
• Eliminate the proposed capital add-on for the ring-fenced banks, as this will deter entrants and raise the cost of capital for incumbents.  Instead rely on the Basel III capital conservation and counter cyclical buffers approach to capital adequacy.  A robust supervisory and resolution regime should allow poor banks to fail without recourse to the taxpayer.