U.K. Banking Commission Proposal Could Hurt Some Bank Ratings

| About: iShares MSCI (EWU)

Credit ratings of some big UK banks could suffer because of the Independent Commission on Banking’s proposals for separating retail services from banks’ wholesale and investment banking businesses, according to Standard & Poor’s.

Highlights from U.K. Independent Commission on Banking Interim Report: Structural Reforms Could Have Divergent Ratings Impact

  • The Independent Commission on Banking published its interim report on April 11; the final report is due in September.
  • The report has a wide remit and we believe it could influence international regulation.
  • Ring-fencing of retail banking might reduce our assessment of likely government support in determining certain credit ratings.
  • Banks’ stand-alone ratings could suffer from greater funding and capital constraints.
  • Additional capital requirements for retail businesses could improve capital scores.
  • We remain sceptical over competition measures.

The preferred approach of the ICB would be to adopt ring-fencing, whereby such services are contained in separately capitalized subsidiaries, leaving the structure of the rest of the banking group largely unchanged.

In our view, and despite the balance sought between financial safety and risk taking inherent in this approach, there could be an impact on our U.K. bank ratings if we were to adopt a more conservative approach to giving benefit for the likelihood of systemic support.

Further, to the extent that ring-fencing might “trap” some capital in retail entities, then that could potentially open up rating differentials between current “core” subsidiaries under our Group Methodology criteria. The possibility of reduced flexibility might also lead to a more negative view of group capital–all other factors remaining equal. Similar considerations might apply to our funding analysis to the extent that ring-fencing reduces funding flexibility across groups.