World Economy

UK Banks Win Reprieve on Regulations

UK Banks Win Reprieve  on RegulationsUK Banks Win Reprieve  on Regulations

The UK’s largest lenders breathed a sigh of relief as the government softened conduct rules and the Bank of England revealed that banks will face a “limited” capital gap when they’re forced to separate consumer banking from investment operations, Bloomberg reported.

On conduct, the government backtracked on a plan to assume senior managers of banks are guilty until proven innocent, substituting it with a “duty of responsibility” that will extend across the entire financial-services industry. The scrapped “reverse burden of proof” in rules for senior managers would have forced bankers to prove they were unaware of wrongdoing at their firms.

Separately, the BOE’s Prudential Regulation Authority estimated its so-called ring-fencing regulation could mean an additional capital requirement of as much as £3.3 billion ($5.1 billion) for affected banks by 2019, an amount analysts said wouldn’t be difficult to raise. The rules are aimed at ensuring that financial services crucial to the UK economy, such as deposit-taking, payments and overdrafts, will be protected if riskier units incur losses and have to be shut down.

“It’s a positive day for the banks,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, England. “There’s nothing particularly negative from the BOE, while the guilty until proven innocent rule had gone against the rest of the legal system. You need the regime to be accountable and fair and it had possibly swung too far the other way.”

Barclays shares jumped as much as 1.2% after the announcement and traded at 247.8 pence at 12:16 p.m. in London, up 0.7%. HSBC, Europe’s largest bank, rose 0.3% to 516.9 pence, while RBS advanced 1.2%.

Together the steps help to alleviate two of the biggest headaches for Britain’s largest banks, easing concerns they wouldn’t be able to attract the most talented executives from around the globe to fill senior roles and reducing the likelihood that lenders will need to go cap-in-hand to investors for fresh capital as they comply with the ring-fencing rules intended to help solve the problem of too-big-to-fail banks.

In softening the Senior Managers and Certification Regime, the government gave ground on one of the post-financial crash rules that had prompted most concern among top bankers.

Simon Morris, a financial services partner with law firm CMS, called the changes the “most astonishing regulatory U-turn in decades.”

“It’s not just a change of mind, but represents the formal abandonment of flagship statutory provisions only months before they were due to come into force,” he said. “In real terms, the reversal of proof was never likely to make a large difference, but the message it gave off was that the UK was a hostile environment for finance.”

Andrew Tyrie, chairman of the Parliament’s Treasury Select Committee, said it “would be concerning if this change was a response to special pleading from the banks.”

 Finance Executives

Executives at UK insurers, mortgage brokers and payday-loan companies will also be covered by the same requirements as those at banks under the Bank of England and Financial Services Bill, which was introduced in Parliament on Thursday.

The new regime is due to come into effect in March 2016 and banks are in the midst of mapping out who is responsible for which areas and personnel.

In a consultation paper published on Thursday, the PRA said requiring ring-fenced banks to meet capital thresholds as a sub-group of the parent company “may result in increased capital requirements for some firms.”

The rules will probably apply to HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc, Barclays Plc, Santander UK Plc and Co-Operative Bank Plc.

The additional burden is due to the protected unit being measured on a standalone basis for its capital needs. In addition, any transactions between the ring-fenced unit and other parts of the institution will be classed as third-party deals, meaning capital will have to be held against them.

 ‘Critical Services’

Applying bank-specific capital requirements to a ring-fenced lender on a sub-consolidated basis and not granting large-exposure permissions across the ring-fence could boost total capital requirements by £2.2 billion to £3.3 billion in aggregate, the PRA said.

The PRA also issued proposals on how a bank can ensure continuity of services in the event part of it fails. These involve managing “critical” shared services such as IT functions in a way that allows business to continue. The PRA estimates one-off costs of about 5% of total operating expenses to meet the new requirements, plus ongoing annual costs of about 3%.

While the PRA said banks may try to pass on higher costs to customers, this will depend on other factors, including competition and new entrants to the banking market.

“It’s not a bombshell at all,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London “With the amount of capital the banks are generating, they’ll be fine reaching the requirement.”

Although the rules probably won’t require a lot of new capital they could still put UK-headquartered investment banks at a disadvantage to overseas rivals.

“The need to hold capital against large intra-group exposures means the universal banking model is suffering,” said Alan Bainbridge, a partner at law firm Norton Rose Fulbright in London. “It’s going to apply pressure to European investment banking that we’re already seeing to the advantage of the big American banks.”