UK Central Bank Could Ease ‘Ringfencing’ Rules for Lenders

The Bank of England is reportedly looking to ease its “ringfencing” rules for British lenders.

As the Financial Times (FT) reported Monday (May 19), this effort is happening as the central bank (BoE) is facing calls to abandon those regulations altogether.

The ringfencing rules require British banks to keep their retail operations separate from other, potentially riskier, activities.

Sam Woods, who heads the BoE’s Prudential Regulation Authority, has told staff to come up with options for relaxing the ringfencing rules without sacrificing the basic protections they provide for retail deposits, the FT said, citing sources familiar with the work.

According to the FT, regulators are considering two areas for potential changes: the rules barring banks from doing riskier activities within the ringfence, and the limits on how they structure back-office services like IT support, human resources and regulatory compliance.

The regulations, which went into effect in 2019, are designed to prevent the need for taxpayer bailouts of failed banks that came with the 2008 financial crisis.

However, the FT added, banks have been pressuring the government to scale back some of the more burdensome parts of the program. The rules are designed to protect deposits from retail consumers and small businesses by requiring larger U.K. banks to place them within legal entities with higher levels of capital and restricted activities.

Thus, banks are blocked from using funds from retail depositors to finance complex and risky activities like hedge funds, complex derivatives or lending to companies based in riskier countries such as China, the report added.

The report follows news from earlier this year that the BoE was preparing to relax rules for banks and insurers, with Woods telling a House of Lords committee that financial resilience and economic competitiveness “go hand in hand.”

He made these comments when discussing new efforts to address government demands to bolster economic growth, arguing that these changes can happen without sparking “a race to the bottom” on financial regulation.

On the other side of the Atlantic, U.S. regulators are reportedly planning to make major cuts to banks’ capital requirements, scaling back reforms stemming from the 2008-2009 financial crisis.

“Penalising banks for holding low-risk assets like Treasuries undermines their ability to support market liquidity during times of stress when it is most needed,” Greg Baer, chief executive of the Bank Policy Institute, told the FT last week. “Regulators should act now rather than waiting for the next event.”