Question

The post-crisis proposals included in the Vickers Report became law in 2013 (the “Banking Reform Act”) and will come into force in 2019. Discuss how the UK ring-fencing rules will affect universal banks.

Answer 1

What is ring-fencing rules?

As we all know that in now-a-days big banks are involved in day-to-day banking as well as in investment banking. So as per ring fencing rules the larger banks in UK will separate their day-to-day banking services from investment banking. This is important for financial stability in big banks and so it was an important agenda of UK Government.

To Whom These Rules Applicable?

Any bank who has at least £25bn of core deposits in European Economic Area (EEA) will comply with these rules from January 1,2019.

How it will affect universal banks?

1. After this rule comes, many banks now restructuring to separate their retail banking activities. This is happening through a court process which is known as ring fencing transfer scheme.
2. Many customers’ sort code was changed during this process of restructuring.
3. More than £800bn of assets were moved through court-approved processes.
4. By Ring-fencing the retail bank helps to make sure that it can continue to offer consumer banking services seamlessly. It will still be able to lend, and your money is safe. In other words, your money is not going to the investment banking division of the banks for financial assistance.
5. Separating retail banking services is a reform to make the system safer.
6. Now these banks must have a governance and management structure which will take its own decisions in the interests of the ring-fenced bank, independently of the rest of the group. This reduces the risk of contagion from the rest of the group.
7. Additionally, the ring-fencing program make it clear to customers which part of the bank they are dealing with.
8. It is not cheap to implement. Ring fencing has increased the regulatory costs for the UK banks.

To conclude, separating retail banking services is just one aspect of reforms to make the system safer, transparent and easy to use.