Keith Skeoch: evidence alone will determine UK bank ringfencing

The writer chairs the UK’s independent review of bank ringfencing and proprietary trading

The 2008 financial crisis has dominated the UK banking industry for over a decade. It is hard to capture the sense of shock that many people experienced during those fragile days. Yet today, given the transformative events such as Brexit and Covid-19 that have happened since, it can be tempting to dismiss what happened over a decade ago as something of a non-event.

I believe this is a temptation we need to resist, not least when it comes to ringfencing. This refers to the 2013 law that required UK-based banks to separate their retail and investment banking divisions. Its underlying aim, which came into formal effect in 2019, is that banks must shield their retail operations from their investment banking operations to protect consumer services from the shocks of a financial crisis. As required under its terms, the law is now under independent review from a panel that will report its findings to Chancellor Rishi Sunak later this year.

As chair of that review, my key consideration is whether the changes that have taken place in the UK over the past decade have affected the law’s suitability. Some in the industry reportedly believe that ringfencing inhibits economic growth and inward investment to the UK, and leads to higher costs.

In the past few months, I’ve found myself rethinking the financial crisis, and its costs and consequences. The most recent assessment by the Office for Budget Responsibility puts the implied cost of the government’s financial intervention into the sector at £37bn. This sum might now pale in comparison to the size of pandemic-related spending. But the figure also doesn’t fully capture the time or resources required of government to manage its banking interventions over the past dozen or so years.

This is not a criticism. In fact, the government has had some notable successes exiting businesses that were nationalised during the crisis. In February, almost 14 years after worried customers queued to get their savings out of Northern Rock, the government sold the last of its remaining stake in the group and its stake in Bradford & Bingley, the building society-turned-bank. In March, it also sold down some of its stake in NatWest Group, which used to be known as Royal Bank of Scotland, although it still owns almost 60 per cent.

What this timeline demonstrates to me is that government interventions in even small, relatively simple or “vanilla” banks, such as Bradford & Bingley or Northern Rock, still took over a decade to unwind. That alone is a strong case for ensuring that state intervention is not needed for any banks that might fail in the future. The public sector is not a natural bed fellow for financial assets that originate in the private sector.

All of which brings me to two very simple questions, both of which underlie the independent review. Has ringfencing reduced the need for future government intervention? And if so, what has been the true cost?

The original rationale behind ringfencing was to protect core banking services, such as deposit taking, from the riskier world of investment banking and complicated financial instruments. Some argue that the British banks that got into financial difficulty, such as Northern Rock or HBOS, did not have investment banking arms to begin with.

Others claim that the implementation of subsequent banking reforms have increased capital and liquidity requirements and made it easier to wind down banks, which in turn has made ringfencing redundant. One estimate suggests that ringfencing has cost the British banking sector £7bn, and the loss in terms of lower competitiveness is disproportionate to the benefits that ringfencing might deliver.

These are compelling arguments and reasonable people will disagree over them. Indeed, after a decade of banking reforms, it is right to consider whether ringfencing has had its desired impact, which areas it has improved, which it has not and what, if any, unintended consequences may have flowed from it. That is why, in today’s call for evidence by the review panel, the emphasis is on evidence.

This call for evidence from both the public and interested parties is a unique opportunity to help shape the review, which in turn will help shape the future of UK banking. Where the review believes that changes are needed, recommendations will be put forward to the Treasury. However, I want to stress that if any recommendations are made, they will be led by the evidence.