That ring fence will be electrified after all

So, it’s happening. The Banking Reform bill to be published today will give the Treasury and the bank regulator the power to break up a bank that doesn’t respect the ringfence between retail banking and the riskier stuff.

The ‘electrified’ ringfence was advocated by Parliamentary Committee on Banking Standards, which is chaired by Conservative MP Andrew Tyrie, which reported in December of its review of the government’s planned Vickers’ reforms.

Tyrie himself and Nigel Lawson, also a member of the committee, reminded us in the past couple of weeks, just in case it was lost in the Christmas-season newsflow. An Ipsos Mori survey of nearly 100 MPs indicated the committee had broad support for tougher bank rules, including the electric ringfence.

From today’s FT:

In a speech on the future of banking, Mr Osborne will say: “My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence.”

This “sword of Damocles” approach was recommended in December by a cross-party parliamentary banking commission headed by Conservative MP Andrew Tyrie, with members including Lord Lawson, former Tory chancellor, and Justin Welby, the next Archbishop of Canterbury.

And what does the banking sector think? No prizes for guessing:

The British Bankers’ Association said the move would create “uncertainty for investors” and make it harder for banks to raise capital, leaving them with less money to lend to businesses. One senior banker said Mr Osborne was “playing politics with the economy”.

On the plus sides for the banks, Osborne won’t try to change the leverage ratio beyond 1:33.

Yet investors in big UK banks weren’t deeply moved by the prospects of electrification. In a market where the FTSE 100 was off by 0.27 per cent at pixel time:

Presumably it was priced in, given the large amounts of lead-up in the past month or so. And it’s not like there’s been much cause for ebullience about the UK banking sector, of late

Credit Suisse analysts are not so sanguine. They say that of the big UK banks, the move is probably worst for Barclays and possible for RBS.

The UK seems to be ‘going it alone’ relative to Europe, where the Liikanen proposals appear to be softened, especially on the issue of ring fencing.

This doesn’t seem so alarming – the UK’s objections to blanket EU banking regulations are well known, and as Wolfgang Münchau points out, it’s not like the rest of the EU is moving towards a unified, Liikanen-style regime anyway:

France and Germany have, in short succession, proposed measures to ringfence banks’ proprietary trading activities. The two countries have co-ordinated their moves with each other, but with nobody else. Would not a ringfence be a power any self-respecting banking union would want to usurp?

Back to CS on the UK banks themselves. They identify some known unknowns on the costs to the banks:

Reducing options to transfer capital and funding – As we understand it, banks will be under tight scrutiny to implement strictly a ring-fence. This will clearly limit the flexibility for banks when setting-up their ring-fence plans and limit options to transfer capital and funding. Although this is hard to estimate at this stage, this could increase the overall costs of the reform for the industry. We currently do not have an impact in our estimates.

And a reminder of the implementation costs to the broader economy:

Estimates costs from implementation – The draft legislation published in October 2012 highlighted the following costs for the broader industry and economy: (i) on-going costs of £2-5bn per annum, which compares to our total profit £26.1bn for the five listed UK banks in 2014E; (ii) one-off transitional costs of £1.5-2.5bn; (iii) negative GDP impact of 0.04-0.1%; (iv) reduced tax receipts of £150-400mn (this assumes all bank costs are passed onto the consumer); and (v) a reduction in the value of the government’s shareholdings in RBS and Lloyds Banking Group in the range of £2bn to £5bn relative to a ‘do nothing’ baseline scenario (compares to current value of £45.1bn).

Perhaps the banks can reassure themselves with the indisputable knowledge that electric fences never really work anyway.

Related links:
Banking review calls for stricter reforms – FT
MPs back splitting up banks – FT Westminster Blog
Lawson urges full nationalisation of RBS – FT