New Rules Force U.K. Banks to Restructure, Hold Extra Capital -- 2nd Update
October 15 2015 - 7:19AM
Dow Jones News
By Max Colchester and Margot Patrick
LONDON--Several U.K. banks will have to restructure their
operations and find extra capital in the coming years to comply
with tough new rules imposed by the Bank of England.
Big U.K. banks will be required by so-called ringfencing rules
to separate their retail banks from investment banking activities.
The aim is insure depositors and small businesses aren't put at
risk if a lender's investment banking operations fail.
On Thursday the Bank of England said the ringfenced retail
operations of big U.K. banks would have to hold extra capital to
cover systemic risk in their operations, even if they are part of
larger well capitalized banks.
The central bank's Financial Policy Committee has yet to
determine exactly how much extra capital the six affected banks
will need to hold but the regulator said they may need a total of
GBP3.3 billion ($5.12 billion). The required leverage ratio will be
determined in 2017.
The Bank of England also said that banks subject to the rules
will need permission from the central bank for their retail arms to
pay dividends to their parent companies and pay market rates for
services provided by other parts of their organizations.
The new rules come into force in 2019 and apply to six U.K.
banks which each hold more than GBP25 billion in deposits--
Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC, Royal
Bank of Scotland Group PLC, Co-operative Bank PLC and Santander UK,
the British arm of Spain's Banco Santander SA.
Details on the rules, though tough, offered few surprises to
bank investors, prompting bank shares to rise on the news.
The plans are in line with expectations, said Steven Hall,
banking partner at KPMG. Banks "can pay dividends against a
backdrop of capital requirements which are tightening," he
said.
Since the ringfencing idea was proposed in 2011 banks have been
lobbying hard to water down the rules.
Bank executives have expressed concern that they won't be able
to control their ringfenced units, which will have their own board
of directors and management. Another major concern: how much
capital needs to be locked up in the units and how easily dividends
can be paid up to the holding company.
Guidelines published by the central bank in a paper Thursday
gave more clarity on how these units will be structured.
Ringfenced entities will need their own support functions,
although they will be able to access other functions, such as back
office support, within the larger group through outsourcing
agreements, the paper said.
The new rules could hinder moving capital around the banks.
Lenders will have to hold capital against loans made between the
ringfence and non-ring fenced bank, the Bank of England said.
Some retail-focused banks, such as Lloyds Banking Group PLC, are
aiming to put most of their operations within a ringfenced entity.
Others such as Barclays PLC and Royal Bank of Scotland Group PLC
face a challenge to ensure they can effectively run two stand-alone
banks under a holding company. Executives at HSBC Holdings PLC,
which has large global operations, are particularly eager to be
able to redeploy excess reserves to more profitable parts of their
banking empire.
The regulator is planning to tweak the rules depending on each
bank's business model and lenders will be allowed to apply for
waivers after the final rules are published in 2016.
Write to Max Colchester at max.colchester@wsj.com and Margot
Patrick at margot.patrick@wsj.com
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(END) Dow Jones Newswires
October 15, 2015 07:04 ET (11:04 GMT)
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