UK Banks Push to Break the Fence — BoE Weighs Smarter Ringfencing

The story so far

The Bank of England’s Prudential Regulation Authority (PRA) has asked supervisors to sketch out ways of easing the UK’s ring-fencing regime — the post-GFC firewall that forces banks with ≥ £35 bn of core deposits to quarant­ine retail banking from riskier wholesale activity. The move comes as the heads of HSBC, Lloyds, NatWest and Santander lobby Chancellor Rachel Reeves to scrap the rules they say swallow ~£1.5 bn a year in operating cost.

Since coming into force in 2019, ring-fencing has corralled £1.2 trn of deposits inside legally separate, thick-capitalised entities. It has largely done what it says on the tin: no UK taxpayer has rescued a major bank in the past 15 years. But the structure is rigid — and increasingly at odds with an industry that is digital, borderless and, frankly, itching for scale.

What might change

Woods’ team is exploring two levers:

Lever	Current constraint	Why it matters	Possible tweak
Operational services	In-house IT, HR and compliance must sit inside the ring-fence, or be sourced from a stand-alone “servco”.	Adds fixed cost, creates duplic­ation.	Allow group-wide shared-service centres if they meet resolvability tests.
In-ringfence activities	RFBs barred from commodities prop-trading, complex derivatives, and most inter-financial exposures.	Limits hedging choices for SME clients; pushes business to non-UK desks.	Narrow “prohibited list” via secondary legislation so plain-vanilla FX, cleared IRS and simple commodities hedges can be booked in the RFB.

These would not scrap the fence, but would make it smarter — mirroring the Treasury’s draft statutory instrument that takes effect on 4 Feb 2025.

Who cares most?

• Digital challengers with Wall Street parents. JPMorgan’s Chase UK is already past £20 bn of deposits and Marcus (Goldman Sachs) sits near £23 bn; another deposit-hungry year could tip them over the £35 bn trip-wire. A looser service-company rule would let them grow without copying the Big Five’s costly two-stack model.

• Incumbents. Barclays and HSBC have spent nine-digit sums building ring-fence architecture. They now argue reforms should go further or, in Barclays’ case, stay put — proof that where you sit really does dictate where you stand.

MY TAKE

1. Preserve the principle, tune the plumbing. Depositor protection is non-negotiable. But forcing every £ of SME deposits through a fully stand-alone ops stack is over-engineering. Regulators could adopt a resolution lens: if a service can be substituted or continued in resolution, let it stay outside. That aligns ring-fencing with the Bank’s own Resolvability Assessment Framework.

2. Risk-weighted threshold beats blunt size cap. The £35 bn line was lifted from £25 bn last year — good, but still coarse. A bank with £40 bn of insured deposits and zero trading book is not the same animal as one with repo lines to every prime broker in Canary Wharf. A Basel-consistent leverage-plus-RWA metric would better capture systemic externalities while avoiding a ‘speed-limit’ on successful retail franchises.

3. UK competitiveness ≠ deregulation at any cost. Wholesale markets crave clarity. A binary scrap-or-keep fight risks political flip-flop just as the City is marketing itself as a steadier ship than New York or Frankfurt. The Mansion House reforms in July should therefore bake the ‘smarter fence’ into a multi-year roadmap, so capital can price the rule-set with confidence.

4. Investors: watch OpEx and RWAs. Any relaxation that lets banks collapse duplicative service companies could deliver 5-10 bp of group RoE uplift, based on service-company margins disclosed by Lloyds and NatWest. On the flip-side, moving more derivatives into RFBs will drag average RWA density higher unless offset by IRB model tweaks. Expect management to talk up ‘capital headroom’ on H1 2025 calls.

Bottom line

Ring-fencing was the right medicine for 2009-style contagion. But like all prophylactics, dosage matters. The PRA’s willingness to fine-tune — rather than rip out — the regime is pragmatic: it keeps the ‘fortress retail bank’ concept alive while giving the sector room to innovate and, crucially, to compete with global peers. Investors should be ready for a slow-burn regulatory pivot, not a big-bang repeal.