Financial isolation measures, or ringfencing, may prove disadvantageous for both UK banks and their customers.
Ranting in the Heart of NY Banking vs Brexit-Beaten UK
Sitting at my desk in the bustling city of New York, I'm surrounded by banks - from global giants to local corporate and retail ones, all flourishing. This dynamic sector is a critical element of the US economic success we enjoy every day.
But stepping across the Atlantic, it's a different story. The UK banking sector is a sad echo of its former self, lacking the vibrancy and drive of its US counterpart. So, what's keeping the Brits down? It's not a lack of ambition or talent, far from it. Nope, the issue lies in a regulatory regime that's causing more harm than good.
Let's talk about ringfencing - a regulation dreamt up with the best intentions but turned into a monstrous beast that's bad for customers, bad for the sector, and bad for stability. With roots in the 2008 financial crisis, ringfencing didn't fully take effect until 2019, but since then, it's become clear as day that it's a disaster waiting to happen.
The main problem? Banks are forced to invest their ringfenced deposits into domestic assets. This "trapped" cash means ringfenced banks are chasing the same domestic assets, driving prices down and consolidating power in the hands of big banks. Smaller competitors are left out in the cold, weakening competition, curbing innovation, and stifling growth.
A Bank of England paper from 2020 addressed the issue, stating that "ringfencing could contribute to the exit of smaller lenders from the UK mortgage market. The increased market power of large banks could lead to more expensive credit over the longer term for customers."
Is it just the little guys suffering? Hardly. UK banks are now overloaded with domestic assets, creating a potential financial time bomb that threatens not only the sector but the entire economy.
In an attempt to address these issues, the government increased the ringfencing threshold from £25bn to £35bn last year. Tulip Siddiq, then City Minister, said, "The reforms will improve competition and competitiveness in the UK banking sector and support economic growth."
But ringfencing doesn't just create competition issues. It raises the specter of systemic instability with banks outside the ringfence taking on more and more high-risk assets. This concentration of credit to British customers makes the entire system precarious, with UK banks holding all their eggs in one basket.
Ringfencing was supposed to tackle the "too big to fail" problem, protecting banks and consumers from existential threats. In reality, the hyper-concentration in UK domestic assets created by ringfencing doesn't make financial institutions safer. Instead, it leaves the system more vulnerable to collapse.
Navigating a balanced regulatory approach in the complex banking sector is no joke. But in the past, British regulators were supportive of fostering innovation and growth, creating an environment for success. It's time we returned to those times. The intentions behind ringfencing were good, but it's doing more damage than good. For the sake of Britain's consumers, economy, and stability, it's high time we rethink this harmful regulation.
In the wake of the UK's faltering banking sector compared to the US, the issue of ringfencing regulation emerges as a significant concern. This regulation, designed to protect banks and consumers from potential risks, has instead led to a hyper-concentration of UK domestic assets, threatening both the sector and the economy. Consequently, the current regulatory regime, rather than fostering competition and growth, appears to be causing more harm than good, necessitating a reevaluation of this approach for the benefit of UK consumers and the overall stability of the economy.
