The Bank of England’s Prudential Regulation Authority will seek to quash fears that the separation of retail and investment banking activities will cause capital to be trapped.
Some senior bankers — notably at HSBC — have attacked new rules that force the biggest lenders to hive off their consumer lending operations into separately governed and funded entities. This, they argue, means they will lose control of a key part of their business.
But on Thursday the PRA is expected to say it will not prevent ringfenced entities from paying dividends to their parent companies — and ultimately to shareholders — if their capital levels are above regulatory requirements.
Two senior bankers said Andrew Bailey, PRA chief executive, was planning to reinforce this point as early as next week in his annual City banquet speech to leading financiers. The PRA declined to comment; one person close to Mr Bailey said the speech was not yet finalised.
The skeleton vision for ringfencing — which will affect any bank with more than £25bn of deposits — has already been set out but Thursday’s consultation paper will put “meat on the bones”, according to regulatory insiders.
Groups with large investment banking arms — such as Barclays and HSBC — will be harder hit than others — such as Lloyds and Santander UK. But all of them have been lobbying hard against the rules and are pinning their hopes on the PRA to water them down in implementation.
A key question to be resolved this week is over capital and liquidity requirements — or how much of the safest kind of capital, and assets that can be easily converted into cash — the ringfenced bank must hold.
The PRA will also determine how a ringfenced bank will interact with the rest of the banking group, or how “electrified” the ringfence will be.
Experts say the banks are worried about whether the operations they put outside the ringfence will be sustainable, particularly if they are forced to fund them on a standalone basis. Stripped of the support from the rest of the group, these mainly corporate and investment-banking operations could struggle to achieve an investment-grade credit rating, which is essential to operate in many areas of those businesses.
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