U.K. Banks Face Short-Term Challenge in Adapting To Interim Regulatory Reforms

Includes: HSBC
by: Research Recap

While the “ringfencing” provisions of the Independent Commission on Banking’s reform recommendations have stolen the headlines, Oxford Analytica argues that UK banks face more immediate challenges in implementing the IBC’s interim regime.

Although the coalition government presented the Independent Commission on Banking’s reform recommendations (the ‘Vickers report’) as radical, they reflect the need to protect London’s position as a leading centre for international banking. The central change — the separation of retail from investment activities — was heavily flagged, while the timescale for implementation is consistent with Basel III. For banks, the impact depends on the scale of internal restructuring that will be required; this depends on the degree of tie-in between retail and investment business and on the extent to which the balance sheet is foreign-based. Since only Barclays, among the big four, scores significantly on both, few of the big institutions are likely to relocate.

The proposals will not lead to regulations in respect of international banking that depart significantly from Basel III.

  • For most UK-based banking operations, the impact of the Vickers report is moderate.
  • When it comes to relocation, HSBC is more likely to be influenced by rates and rules of corporate and personal taxation than ringfencing.
  • Ringfencing will not stop ‘rogue trading’; despite better regulation, such scandals will arise and cases will even go undetected.

While the integration of the Vickers report and Basel III in 2019 should prove seamless, the big UK international banks will find more challenging the implementation of the revised national regime that the government will impose in the interim. This is much more likely to be tailored to the circumstances of individual banks, and will vary over time, as opposed to the universal policy operated by the Financial Services Authority, which took the banks’ own risk models unadjusted. Even under existing rules, national regulators have considerable individual discretion — the Vickers report will encourage them to use it, whether to rein in investment banking or to assuage concerns about a too-thin retail deposit base.