British Banks May Need to Keep Billions More on Hand Under New Rules

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LONDON — British banks may be forced to increase the capital they keep on hand by as much as $5 billion to comply with new rules intended to protect their British retail banking businesses in a financial crisis, the Bank of England said on Thursday.
The central bank is requiring British lenders with more than 25 billion pounds, or about $38 billion, to wall off their retail banking operations in the country by 2019, a practice known as ring-fencing.
The proposed rules are intended to shield the retail business from the impact of investment banking and other activities in the event of another global financial meltdown.
The Bank of England said on Thursday that the affected banks in Britain, as a group, may be forced to increase the capital they hold by as much as £3.3 billion to meet the coming regulatory requirements, which are still being drafted.
On Thursday, the central bank released its estimate as part of a series of rules contemplated for putting in place ring-fencing in Britain. The proposals are expected to be finalized next year; banks can seek a waiver.
“Making our firms more resilient has been at the forefront of our postcrisis reform agenda,” Andrew Bailey, the chief executive of the Prudential Regulation Authority and deputy governor of the Bank of England, said in a news release.
“Today represents an important step forward in achieving this aim,” he added. “We have provided clarity for affected banks on how we will implement ring-fencing, and this will enable firms to take substantial steps forward in their preparations for structural reform.”
The new rules are expected to force changes in the British retail units of Banco Santander, Barclays, the Co-operative Bank, HSBC, the Lloyds Banking Group and the Royal Bank of Scotland.
As part of the possible changes, the British retail banking businesses would need permission from regulators to make distributions, in the form of dividends, to their corporate parents, the Bank of England said.
The retail banking businesses would be able to continue to cross-sell products and share back office services with other parts of their parent organization through outsourcing agreements, the central bank said.
But they must not be entirely dependent on cross-selling income for financial solvency and must have contingencies in place to continue to provide core services to their customers, such as access to deposits, in the event of a crisis, the Bank of England said.
The ultimate structure of a ring-fenced bank may depend on the lender.
Some banks, such as Lloyds, are primarily focused on British retail banking, so the bulk of their operations could end up in the ring-fenced unit.
Others, such as Barclays and HSBC, will have to separate their retail arms in Britain from their more globally focused investment banks.
“While banks will welcome the additional clarity provided by today’s announcement, there is little in the way of good news,” said Simon Hunt, the British banking and capital markets leader at PricewaterhouseCoopers.
“Ring-fencing will remain costly both in transition and once implemented, and may leave U.K. banks at a strategic disadvantage to their international peers,” he added. “Banks will also have to manage a number of significant uncertainties that still remain, such as the overall capital requirement for the ring-fenced bank when finalizing and implementing their ring-fencing plans over the coming months and years.”