Britain’s biggest banks to be forced to separate retail banks from investment arms

Britain’s biggest banks will have to run their retail banking operations as independent banks, almost entirely separate from their investment banking and overseas operations, as the Bank of England made it clear that there will be no relaxation of the incoming ring-fencing rules.

As a result, regulators hope the high street lenders will be able to continue running the retail arms with no difficulties even if their investment banking arms get into trouble, reports The Telegraph.

Basic services such as payments and bank account access should be able to continue even if the parent group collapses.

Those ring-fenced units must hold bigger capital buffers to protect themselves against a downturn, and have their own independent IT, human resources, processing and risk teams.

However, in one minor concession, the retail banks will be able to pay dividends to their parents, as long as they tell the regulator first and show the payouts will not harm their resilience and stability.

The ring-fence rules apply to HSBC, Barclays, Royal Bank of Scotland, Lloyds Banking Group, Santander UK and the Co-operative Bank, as they all had core deposits of more than £25bn when this process began. Challenger banks which expect to grow to that size by 2019 also need to consider preparing for the changes.

Those banks’ retail units will face their own stress tests as well as those applied to their parent group, under which the Bank of England’s Prudential Regulation Authority checks to see how the bank will cope with tough economic conditions.

From 2019, each bank’s retail banking arm must treat its investment banking operations as if it is an entirely unrelated company. That means for risk purposes, as well as capital buffers and even the financial terms of transactions, the retail arm cannot give other parts of the banking group any favourable treatment.