Post on 28-Mar-2023
Student No- C1452121
Module Code- CLT206
Module Title- International Banking Law
Module Leader- Mr. Howard Johnson
Essay Title- The ring fencing of a bank’s retail banking
services from their more risky investment, wholesale and
proprietary banking activities, scheduled to take place in
2018-19 is the last and most necessary reform of the UK
banking system to prevent a recurrence of a major financial
crisis like the one that occurred in 2008-10”
Word Count- 4,765 words
1
International Banking Law
‘The ring fencing of a bank’s retail banking services from
their more risky investment, wholesale and proprietary
banking activities, scheduled to take place in 2018-19 is
the last and most necessary reform of the UK banking system
to prevent a recurrence of a major financial crisis like
the one that occurred in 2008-10”
Critically assess the above statement.
2
I would like to begin this paper with a brief introduction
of the credit crunch started in the year 2008 and how it
prompted the Government of countries like USA, UK and EU to
revamp their banking structure in order to avert another
financial crisis. In the second part of the paper, I would
like to consider the system of Ring-fencing as suggested by
the Vickers Commission in the UK, its advantages and
disadvantages, whether it is the last and most necessary
reform which could avert another financial crisis. The
system of ring-fencing may not be the answer to prevent a
reoccurrence of a financial crisis of 2008.
INTRODUCTION
The financial crisis of 2008 and its aftermath are still
fresh in the memories of the general public. The Credit
crunch originally began in USA its tremors were felt
3
throughout the world. The brunt of the financial crisis was
mainly borne by the investment banking sector in the United
States of America. Lehman Brothers, one of the famous
investment banks filed for bankruptcy on September 15, 2008
in the United States, which immediately exposed many other
investment banks in United States which almost led to the
collapse of the American economy. The administration
quickly stepped in to stop the collapse economy and also
announced bailout packages at the expense of the treasury
to a number of banking entities.
It is submitted that none of the banking entities failed
during the heights of the credit crunch of 2008 in the UK,
however in the year 2007 there was a rundown on Northern
Rock, a bank mainly operating in the retail sector within
the jurisdiction of United Kingdom. In addition to the
crisis at Northern Rock the British banking scene was hit
by a slew of scandals such as the Libor misquoting issue,
the mis-selling of PPI and interest rate swaps to name a
few. The reputation of the bankers and the banks had
reached its lowest ebb amongst the general public.1 The
newly elected Conservative led coalition government was
supposed to convene an Independent Commission on Banking,
however due to the serious nature of the banking scandals
at the forefront, the government requested the
1 Alastair Hudson The Law of Finance, Sweet and Maxwell (2nd Edition2013 Page 881)
4
Parliamentary Commission on Banking Standards to suggest a
legislative change.2
In the year 2010 the Coalition government in the UK
commissioned a report from the Independent Commission on
Banking under the leadership of Sir John Vickers. The final
report which is famously called as the Vickers Report was
submitted in September 2011.3 The Independent Commission on
Banking headed by Sir John Vickers recommended to impose a
ring-fence which was akin to the legal separation of
banking activities existing in United States in the 1930s
and which was also applied to the banking activities in
post-war Japan in the 1940s, however there is no conclusive
proof that such legal separation could prevent a banking
crisis.4
The Vickers Report pursuant to studying the existing
banking structure in the United Kingdom made some important
recommendations. The following are some of the main
recommendations of the Vickers Report:
i. One of the main recommendations made in the
report was that the banking structure in the UK
ought to be Ring fenced with the Investment
Banking activities, but without total separation.
2 Alastair Hudson N1 above page 8823 Alastair Hudson n1 (Page 882)4 Ring-fencing UK Banks More of a problem than a solution Edited byJames Bartyhttp://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 26/12/2014 Page 6
5
In essence both the Ring fenced division and the
Non Ring-fenced division would be part of the
same entity. The Ring-fenced group would be
engaged in accepting deposits and making payments
on behalf of its customers and the Non Ring-
fenced group would be engaged in other riskier
operations,
ii. The report also recommended that, the banks in
the UK should have a higher capital requirements,
iii. It was also recommended that, the banks in the UK
should also have a higher loss absorbing
capacity,
iv. The report recommended that, banks in UK should
have independent governance. The Ring-fenced
group should have its own independent board of
directors and Chairman from that of the
Investment banking operations or the Non ring-
fenced entity.
v. It was recommended that, the recommendations
should be implemented as soon as possible and
should be finalised by 2019.5
In essence, the suggestion made in the Vickers Report is
that, the retail banks operating in the UK would be ring-
fenced from the other activities and that the ring-fenced
banks would be prohibited from dealing in risky derivatives
and would be limited to deposit taking, making payments and5 Alan Bainbridge, David Shearer, James Atkinson, Kenneth Gray and SimonLovegrove, Legislative Comment, The Banking Reform Act 2013 (2014 COBPage 2)
6
similar activities. The Government was of the opinion that
a ring-fenced bank would be prohibited from carrying out
international, wholesale investment banking services and
other risky activities hence it would be more prepared to
survive financial shocks that may arise in the future.6 The
object of Ring-fencing could be to divide the wholesale and
investment businesses of a bank from its retail activities
so that the former does not have a negative impact on the
financial condition of the latter.7 It is important to point
out the fact that, the steps adopted by the UK are
different to the ones adopted by the EU and the USA.
The concept of ring-fencing has assumed that, the retail
banking business in the United Kingdom is completely free
from risks, this can be proved otherwise with the example
of the rundown of Northern Rock which did not have an
investment and still it became a victim of the financial
crisis of 2008.8 One of the main reasons for the failure of
the retail banking business can be attributed to the poor
quality of due diligence carried out prior to the
sanctioning of loans to the customers. This could be
addressed by the better management of the banks as a whole.
Further, according to the new act, the ring-fenced fenced
entity and the non-ring-fenced entity are not completely
6 Alan Bainbridge, David Shearer, James Atkinson, Kenneth Gray and SimonLovegrove (n4 above page2)7 Alan Bainbridge, David Shearer, James Atkinson, Kenneth Gray and SimonLovegrove (n4 above page5)8 Mark Field, Vickers Ringfence is no Panacea, (2012-2013) 31 Int'l Fin.L. Rev. 62, (http://heinonline.org) Accessed on 22/12/2014
7
separated the non-ring-fenced entity would continue to
carry on business with the same name and style of the ring-
fenced bank. The management of the ring-fenced and the non
ring-fenced entity would be different, however in the event
of the failure of the non-ring-fenced entity there is every
chance that the business of the retail bank might be
affected.9
Concept of Ring-fencing is not new
It has been argued that the concept of ring-fencing opted
in the United Kingdom similar to the ring-fencing system as
envisaged in the Glass-Steagall system that existed in the
USA pursuant to the great depression of 1929. The Glass-
Steagall system essentially separated the retail banking
and the investment banking from one another. The Glass-
Steagall system was only repealed in the year 1999. Hence
it may not suit the prevailing banking structure in the
United Kingdom. The law introduced then in the United
States was with an intention to dictate the structure and
separate the activities of different parts of the financial
services industry. In particular, there was a separation of
the activities of commercial banks from what would now be
termed investment banks. It also prohibited the investment
banks from taking deposits from the general customers which
is one of the important features proposed in the Vickers
report and the same that has been introduced into the act.
9 Mark Field, N8 above P.62, (http://heinonline.org) Accessed on22/12/2014
8
The ring fencing concept despite being in force till the
year 1999 was not successful in averting some of the
financial downturns experienced in the United States. The
concept of ring-fencing has its limitations and flaws most
importantly the aspect of the cost involved in the ring
fencing of the banks and it has also not been tested within
the banking structure of the United Kingdom, hence nobody
can foresee whether it is the best or the last option to
avert another banking crisis.
However after receiving the recommendations made in the
Vickers Report, the Parliament held deliberations and
enacted the Financial Services (Banking Reform) Act, 2013
by inserting Part 9B into the Financial Services Market
Act, 2000. Surprisingly the term ring- fencing has not been
defined in the Financial Services (Banking Reform) Act,
2013. The parliament first decided to enact the primary
legislations and then follow it up with the secondary
legislations at a later stage. I have analysed certain
important provisions of the legislation as follows;
Section 142A “Ring-fenced body”
(1) In this Act “ring-fenced body” means a UK institution
which carries on one or more core activities (see section
142B) in relation to which it has Part 4A permission.
(2) But “ring-fenced body” does not include—
(a) A building society within the meaning of the Building
Societies Act 1986, or
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(b) A UK institution of a class exempted by order made by
the Treasury.
(3) An order under subsection (2) (b) may be made in
relation to a class of
UK institution only if the Treasury are of the opinion that
the exemption conferred by the order would not be likely to
have a significant adverse effect on the continuity of the
provision in the United Kingdom of core services.
(4) Subject to that, in deciding whether and, if so, how to
exercise their powers under sub section (2) (b), the
Treasury must have regard to the desirability of minimising
any adverse effect that the ring-fencing provisions might
be expected to have on competition in the market for
services provided in the course of carrying on core
activities, including any adverse effect on the ease with
which new entrants can enter the market.
(5) In subsection (4) “the ring-fencing provisions” means
ring-fencing rules and the duty imposed as a result of
section 142G.
(6) An order under subsection (2) (b) may provide for the
exemption to be subject to conditions.
(7) In this section “UK institution” means a body corporate
incorporated in the United Kingdom.10
A reading of this section highlights two important aspects.
Building Societies recognised under the Building Societies10Financial Services (Banking Reform) Act, 2013 Section 142Ahttp://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdfaccessed on 24/12/2014
10
Act, 1986 have been excluded from the ambit of ring-
fencing. It is submitted that, currently there are many
building societies which are engaged in the banking
business. Further some of the building societies engaged in
the banking business were hard hit during the financial
crisis of 2008. When the intention of the new act is to
strengthen the existing banking structure of United Kingdom
it might not serve its necessary purpose if the building
societies which are engaged in the banking activities are
exempt from the provisions of the act. The act as it stands
also exempts the Insurance companies, Credit Unions and
Industrial and Provident fund societies despite these
institutions being engaged in holding deposits from their
members which may not be in the best interests of its
members.
“142B Core activities”
(1) References in this Act to a “core activity” are to be
read in accordance with this section.
(2) The regulated activity of accepting deposits (whether
carried on in the United Kingdom or elsewhere) is a core
activity unless it is carried on in circumstances specified
by the Treasury by order.
(3) An order under subsection (2) may be made only if the
Treasury are of the opinion that it is not necessary for
either of the following purposes that the regulated
activity of accepting deposits should be a core activity
when carried on in the specified circumstances.
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(4) Those purposes are—
(a) To secure an appropriate degree of protection for the
depositors concerned, or
(b) To protect the continuity of the provision in the
United Kingdom of services provided in the course of
carrying on the regulated activity of accepting deposits.
(5) The Treasury may by order provide for a regulated
activity other than that of accepting deposits to be a core
activity, either generally or when carried on in
circumstances specified in the order.
(6) An order under subsection (5) may be made only if the
Treasury are of the opinion—
(a) that an interruption of the provision of services
provided in the United Kingdom in the carrying on of the
regulated activity concerned could adversely affect the
stability of the UK financial system or of a significant
part of that system, and
(b) That the continuity of the provision of those services
can more effectively be protected by treating the activity
as a core activity.11
“142C Core services”
(1) References in this Act to “core services” are to be
read in accordance with this section.
(2) The following are core services—
11 Financial Services (Banking Reform) Act, 2013 Section 142Bhttp://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdfaccessed on 26/12/2014
12
(a) Facilities for the accepting of deposits or other
payments into an account which is provided in the course of
carrying on the core activity of accepting deposits;
(b) Facilities for withdrawing money or making payments
from such an account;
(c) Overdraft facilities in connection with such an
account.
(3) The Treasury may by order provide that any other
specified services provided in the course of carrying on
the core activity of accepting deposits are also core
services.
(4) If an order under section 142B (5) provides for an
activity other than that of accepting deposits to be a core
activity, the Treasury must by order provide that specified
services provided in the course of carrying on that
activity are core services.
(5) The services specified by order under subsection (4)
must be services in relation to which the Treasury are of
the opinion mentioned in section 142B (6) (a).12
It is submitted that, another criticism that could be
levelled is that the definitions of core activities and
core services is that they only cover small range of
banking services would be covered by the scope of ring-
fencing. They are only limited to accepting deposits, to
make payments, and to provide overdrafts available. There12Financial Services (Banking Reform) Act, 2013 Section 142Chttp://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_en.pdfaccessed on 26/12/2014
13
would be other banking services including the operation of
current accounts, ordinary lending, mortgages, insurance
and mainstream investment products (such as unit trusts)
which will continue outside that ring-fence and which will
therefore be unprotected by this regulatory scheme.13
The Financial Services and Markets Act 2000 (Ring-fenced
Bodies and Core Activities) Order 2014 was made in exercise
of the powers conferred by sections 142A (2)(b), 142B(2),
142F and 428(3) of the Financial Services and Markets Act
2000 as a secondary piece of legislation which comes into
force from 01/01/2015. In this order various important
aspects have been explained, most importantly this order
explains the core deposit level condition, and also
specifies circumstances which would not be considered as a
core deposit.
“Article 12 Core deposit level condition”
(1) The core deposit level condition is that at any
particular time (‘T’)—
(a) In the case of a UK deposit-taker which is not a member
of a group, its average core deposit total is equal to or
less than £25 billion;
(b) In the case of a UK deposit-taker which is a member of
a group, the sum of the average core deposit totals for
each member of the group that is a relevant group member is
equal to or less than £25 billion.
13 Alistar Hudson Banking Regulation and the Ring-fence, (COB 2013 Page9)
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(2)For the purpose of paragraph (1) (b) a group member is a
relevant group member if—
(a) It is a UK deposit-taker; and
(b) It does not carry out the regulated activity of
effecting or carrying out contracts of insurance as
principal in accordance with permission under Part 4A of
the 2000 Act.
(3)Subject to article 13, the average core deposit total
for a UK deposit-taker is determined as follows;
(a) Calculate the total core deposits held by the UK
deposit-taker at the end of each quarter in the core
deposit calculation period to produce quarterly totals; and
(b)Add those quarterly totals together and divide by the
number of quarters in the core deposit calculation period.
(4)The core deposit calculation period is
(a)In the case of a UK deposit-taker that has existed for
three financial years or more, the period of three
consecutive financial years of that UK deposit-taker which
ends immediately before the start of the financial year in
which T falls;
(b) In the case of any other UK deposit-taker, the period
for which that UK deposit-taker has existed at T.
(5) If a UK deposit-taker holds core deposits in a currency
other than sterling, the quarterly totals referred to in
paragraph (3) must be calculated by converting financial
amounts representing such deposits into sterling.
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(6)The conversion must be made by reference to an
appropriate spot rate of exchange as at the last day of the
quarter to which a quarterly total relates.
(7) In this article a reference to a quarter is a reference
to any complete quarter falling within a core deposit
calculation period for a UK deposit-taker.14
In the (Ring-fenced Bodies and Core Activities) Order 2014
the authorities prescribe that an UK banking entity which
does not belong to any group would be part of the ring
fencing mechanism only if its core deposits are more than
25billion pounds over a period of 3 years and in case of an
UK banking entity which is a member of a group, the sum
average of the deposits of each of the member of the group
should not be less than 25 billion pounds over a relevant
period of 3 years. A mere perusal of the aforementioned
provision highlights the fact that, a bank whose core
deposits are more than 25bn pounds over a period of 3 years
would come under the ambit of ring-fencing legislation.
This criteria might cause a disadvantage to the bigger
banks engaged in the banking over the smaller banks. The
smaller banks which do not come under the ambit of ring-
fencing would be permitted to engage in the selling of
structured products which is considered to be one of the
most important investments for the customers. The ring
14 The Financial Services and Markets Act 2000 (Ring-fenced Bodies andCore Activities) Order 2014, Article 12,http://www.legislation.gov.uk/uksi/2014/1960/pdfs/uksi_20141960_en.pdfaccessed on 24/12/2014
16
fenced banks would be restrained in dealing in such
products which would put them at a considerable
disadvantage over the smaller banks.15 In other words the
smaller banks or the non Ring-fenced entities would be put
to an unfair advantage over the ring fenced entities as
they would not be subject to some of the conditions imposed
by the new enactment. This aspect could be reconsidered by
the law makers so that the there is equality between all
the banking institutions in the United Kingdom.
Costs of Ring-Fencing and its Potential Hazards
One of the major reservations the existing banks in the
United Kingdom have about the decision of Ring-fencing is
the cost involved to ring fence the banks which qualify to
be ring fenced in the United Kingdom. The big banks like
Santander, RBS, Lloyds banking group, Barclays and HSBC
would all have to be ring fenced, since these banks have a
large market share and have a large presence throughout the
United Kingdom it would be a very expensive affair to ring
fence these entities. Recently there was a news paper
article which reported that banks like TSB, Santander and
Virgin Money are joining Royal Bank of Scotland Barclays,
Lloyds and HSBC in submitting their formal ring-fencing
plans to the Bank of England despite the fact that banks
have time till 2019 to formally ring-fence their
15JamesBartyn4abovehttp://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 26/12/2014
17
operations.16 It is important to note that the Bank of
England is still working on certain points of the ring-
fencing regime even to this day as there are confusions
regarding the regulations opted by the European Union and
the effects they might have on the laws opted by United
Kingdom.17 It is pertinent to mention the fact that banking
institutions like Virgin money have submitted their ring
fencing proposals despite the fact that their operations
are limited within the United Kingdom and that they might
not qualify for the ring fencing criteria which is a
deposit of 25 billion pounds over a period of three years.
The Chairman of HSBC Mr. Douglas Flint had quoted that “the
cost of ring fencing for HSBC would cost between one
billion pounds to two billion pounds which was much more
than expected.”18 This clearly proves the fact that ring-
fencing would indeed be an expensive affair for all the
banks operating in the United Kingdom and could hurt their
operational profits.
Another important aspect to be considered here would be the
fact that, till date opening of a bank account in United
Kingdom was free, the banks do not charge the customer to16JamesTitcomb Banks respond to ring-fence plans The Telegraphhttps://uk.finance.yahoo.com/news/banks-respond-ring-fence-plans-201524291.html Article dated 03/01/2015 Accessed on 04/01/201517Sam Fleming, Banks under pressure on UK ring-fencing plans, TheFinancial Times, http://www.ft.com/cms/s/0/562464ee-4d77-11e4-bf60-00144feab7de.html#axzz3NtjKhsbH Article dated 06/10/2014, Accessed on05/01/2015 18 Harry Wilson, HSBC puts price of building banking ring-fence at £2bnThe Times, Banking and Finance,http://www.thetimes.co.uk/tto/business/industries/banking/article4243506.ece Article dated 22/10/2014 Accessed on 04/01/2015
18
open an account. However experts feel that, the concept of
ring-fencing the banks could bring an end to this consumer
oriented service. An article in the daily Telegraph stated
that “if the ring-fenced banks were to be restricted in
their range of products and services as currently envisaged
in the new act, and if individuals with the capability to
deposit high amounts of money take their business abroad,
revenue bases of the banks in the United Kingdom would be
eroded,” which would result in higher costs and lower
revenues would be passed on to individuals and SMEs, who
can bank only with the ring-fenced bank as they are not
allowed to bank outside of the ring fence and this could
result in a fundamental change to the way banks structure
their charges. “Enforcing a rigid ring fence around the
banking activities in the United Kingdom may result in
unintended consequences including further closures of high
street branches and even the end of 'free’ banking.”19 The
heavier the burden on banks, through taxes, capital or
other regulation, the cost of funding the real economy will
become higher and these costs would result, in a tighter
supply of credit, lower rates for depositors and may
possibly the end of “free consumer banking” in UK.20
19Kamal Ahmed, Ring-fence costs could end free banking in UK, TheTelegraph,http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10518242/Ring-fence-costs-could-end-free-banking-in-UK.html Article dated14/12/2013, Accessed on 05/01/2015
20 http://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf N14 above Page 10
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Problem of Competition as a result of the Ring-Fencing
Another area of concern would be that, the concept of ring-
fencing would apply only to an institution which has been
incorporated in the United Kingdom, which means that the
banks that have been incorporated in the European Union or
elsewhere would be exempted from the ring-fencing regime
which may give them an unfair advantage over the banks
incorporated in the UK. E.g. A bank which is headquartered
in the Iceland or any other European country can open its
branch in the United Kingdom without having to go through
the complicated and expensive system of ring-fencing, this
aspect would provide the foreign banks an unfair advantage
over the banks headquartered in the United Kingdom and this
might potentially hurt the profits of the home grown banks
of United Kingdom. The banks which are not incorporated in
the United Kingdom would be capable of serving the
customers as a one stop shop for all their financial needs
and may also attract the high net worth individuals and
large corporations to do business with them. The act as it
stands now permits a high net worth individual and a large
corporation who fulfil certain conditions prescribed in the
Financial Services and Markets Act 2000 (Ring-fenced Bodies
and Core Activities) Order 2014 to bank with a non ring-
fenced entity. This could hurt the business prospects and
also the profits of the smaller banks as a result of losing
business to the bigger banks. Further the banks
incorporated in the UK would not be able to serve as a one
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stop shop for all the financial needs of a customer and
hence the consumers would be forced to approach different
entities of the same group for the services which they want
resulting in an extra financial burden on the consumers.
There is another aspect which is also very important with
reference to competition between banks is that, the big
banks like Santander, Lloyds Banking Group, Royal Bank of
Scotland and Barclays which are also known as the big four
would have an advantage over their smaller counterparts as
they would be able to provide their corporate clients
access to both their ring-fenced and non-ring-fenced
products and services provided they meet the criteria laid
down under The Financial Services and Markets Act 2000
(Ring-fenced Bodies and Core Activities) Order 2014.21 Thus,
the larger banks will have an advantage over their smaller
counterparts which may result in the reduced competition
and the reduced number of choices for the average customer.
E.g. “Where the corporate client needs access to banking
products and services outside of EEA or has sophisticated
hedging needs the ring-fenced banks without a non-ring-
fenced operation will most likely lose the corporate
clients as the client needs services provided by non-ring-
fenced entities and these services cannot be provided by
ring-fenced banks as they are prohibited by the
21 James Barty N4 above http://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 05/01/2015 Page 59
21
legislation”.22 The banks which don’t operate outside the
United Kingdom may end up as the biggest losers of the
ring-fencing regime. With that growth, their needs will
become more sophisticated and a standalone ring-fenced bank
will be unable to meet those needs. These factors may
result in the stagnation of the Banking sector as there
might be no new players to challenge the big banks already
operating in the United Kingdom.
The concept of ring-fencing envisaged for the United
Kingdom is completely different to the model adopted by the
European Union. The European Union received the Liikkanen
report which recommended changes to the existing banking
system of the European Union. The main recommendations in
the report were that;
• “The structural reform proposal will strengthen the
resilience of the EU banking sector while ensuring that
banks continue to finance economic activity and growth.
• It will apply only to the largest and most complex EU
banks with significant trading activities.
• In brief, the proposal would:
1. Ban proprietary trading in financial instruments and
commodities;
22James Barty N12 above http://www.policyexchange.org.uk/images/publications/ringfencing%20uk%20banks.pdf Accessed on 05/01/2015 Page 59
22
2. Grant supervisors the power and in certain instances the
rebuttable obligation to require the transfer of other
high-risk trading activities (such as market making) to
separate legal trading entities within the group
(“subsidiarisation”);
3. Provide rules on the economic, legal, governance, and
operational links between the separated trading entity and
the rest of the banking group; and
4. Increase transparency on shadow banking activities,
especially repo and securities lending transactions. These
transactions have been a source of contagion and leverage
in the financial crisis”.23
The key aspect to be noted here is that, despite there
being a recommendation that the trading activities must be
separated from the more riskier business of the banks, the
difference is that it would only apply to the largest and
complex banks operating in within the European Union, this
may be more cost effective compared to the ring-fencing
idea proposed in the United Kingdom wherein any bank whose
total deposits are over 25billion pounds over a period of 3
years would be ring-fenced, this may be a very expensive
affair for the treasury and also the banks. However the
regulations in the European Union are slated to come into
force only from the year 2017. These proposals are
different from Vickers' to and heap further uncertainty23 http://ec.europa.eu/finance/bank/docs/structural-reform/140129_citizens-summary_en.pdf Accessed on 06/01/2015
23
upon financial services providers in the City of London.24
The differences of the regulations might affect the
secondary legislations that are slated to be passed in the
United Kingdom at a later stage.
CONCLUSION
Despite the best efforts of the authorities to revamp the
banking structure in the United Kingdom and to make them
more resilient, the financial health of some banks in the
United Kingdom continues to be weak. This was recently
brought to the forefront when the Co-Operative Bank failed
the stress test conducted on 16/12/2014 by the Bank of
England and further big banks like the Lloyds Banking group
and the Royal Bank of Scotland managed to scrape through in
the stress test.25 This implies that the banks should work
towards becoming more resilient and to improve their
finances. As mentioned above the ring-fencing rules as
proposed are very complicated and expensive for on the
finances of the bank as well as the treasury and could be
very difficult for the authorities to meet the proposed
deadline of 2018-2019. The banks have already started
submitting their preliminary models of ring-fencing to the
Bank of England in the month of January 2015. Recently,
Lloyds banking group sought for a waiver of the rule which
prescribes two different boards for the ring-fenced entity24 Mark Field, N8 above page 62 (http://heinonline.org) Accessed on22/12/201425Joe Miller, Co-op Bank fails Bank of England stress tests,http://www.bbc.co.uk/news/business-30491161 Article published on16/12/2014 , Accessed on 06/01/2015
24
and the non ring-fenced entity and the reason for seeking
the exemption is that, over 90% of its business would come
under the ambit of ring-fencing and hence two different
boards may not be necessary.26 Omar Ali, UK head of banking
and capital markets at EY, said: “2019 may seem a long way
away, but unravelling decades of infrastructure, systems,
processes and governance is complex, time-consuming and
expensive. Some are likely to need waivers to meet the
timetable.”27 This proves the fact that the, concept of
ring-fencing is not only expensive but also very time
consuming for the authorities to enforce. Only time will
tell if the proposed ring-fencing of the retail banks from
their investment entities in the United Kingdom would be
successful and was it the best step forward to avert
another financial crisis that brought the banking structure
in the United Kingdom to its knees.
26 Martin Arnold and Emma Dunkley, Lloyds Banking Group seeks key ring-fencing rule exemption, TheFinancialTimes,Londonhttp://www.ft.com/cms/s/0/43c18cdc-9502-11e4-8fc1-00144feabdc0.html#axzz3O3CG2IUu Article dated 05/01/2015, Accessed on06/01/201527 Martin Arnold and Emma Dunkley, N26 above,http://www.ft.com/cms/s/0/43c18cdc-9502-11e4-8fc1-00144feabdc0.html#axzz3O3CG2IUu Article dated 05/01/2015, Accessed on06/01/2015
25
Bibliography
Legislation
Financial Services (Banking Reform) Act, 2013
The Financial Services and Markets Act 2000 (Ring-fenced Bodies
and Core Activities) Order 2014
Books
Ellinger.E.P, Lomnicka. E and Hare. C.V.M, Ellinger’s Modern
Banking Law, 5th Edition (2011)
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Hudson. A, The Law of Finance, The Law of Finance, Sweet and
Maxwell (2nd Edition 2013)
Journal Articles
Mark Field, Vickers Ring-fence is no Panacea, (2012-2013) 31
Int'l Fin. L. Rev. 62,
Hudson. A, Banking Regulation and the Ring-fence, (COB 2013 Page
9)
Bainbridge.A, The Financial Services (Banking Reform) Act: timingis everything, (2014) 4 JIBFL 256
Bainbridge A, Shearer D, Atkinson J, Gray. K and Lovegrove S,
Legislative Comment, The Banking Reform Act 2013, 2014 COB 1
Websites
Financial Services (Banking Reform) Act, 2013
http://www.legislation.gov.uk/ukpga/2013/33/pdfs/ukpga_20130033_e
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http://www.legislation.gov.uk/uksi/2014/1960/pdfs/uksi_20141960_e
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Ring-fencing UK Banks More of a problem than a solution Edited by
James Barty
http://www.policyexchange.org.uk/images/publications/ringfencing
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http://www.thetimes.co.uk/tto/business/industries/banking/article
4243506.ece Article dated 22/10/2014 Accessed on 04/01/2015
Kamal Ahmed, Ring-fence costs could end free banking in UK, TheTelegraph,http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10518242/Ring-fence-costs-could-end-free-banking-in-UK.htmlArticle dated 14/12/2013, Accessed on 05/01/2015
http://ec.europa.eu/finance/bank/docs/structural-reform/
140129_citizens-summary_en.pdf Accessed on 06/01/2015
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http://www.bbc.co.uk/news/business-30491161 Article published on
16/12/2014 , Accessed on 06/01/2015
Martin Arnold and Emma Dunkley, Lloyds Banking Group seeks key
ring-fencing rule exemption, The FinancialTimes, London
http://www.ft.com/cms/s/0/43c18cdc-9502-11e4-8fc1-
00144feabdc0.html#axzz3O3CG2IUu Article dated 05/01/2015,
Accessed on 06/01/2015
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00144feabdc0.html#axzz3O3CG2IUu Article dated 05/01/2015,
Accessed on 06/01/2015
28