UK ringfencing clamps down on intragroup loans

Author: Tom Young | Published: 19 Oct 2015
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The UK regulators’ latest ringfencing consultation has taken a hard line on intragroup arrangements between ringfenced and non-ringfenced banks.

The paper, released this week, adds further detail to the requirements for the UK’s largest lenders with core deposits over £25 billion ($38.7 billion).

Despite banks winning a concession within the rules which allow them to transfer capital from their retail arms to other parts of the business in the form of dividends, other measures are less conciliatory.

Of chief concern is how the in-scope banks (HSBC, Barclays, RBS and Lloyds and Santander UK) are going to meet the intragroup exposures between the ringfenced and non-ringfenced side.

With regards to large exposure permissions, the EU Capital Requirements Regulation (CRR) insists that large exposures to individual entities or groups of connected counterparties must be limited to 25% of the firm’s eligible capital.

"No one ever gets near that figure, but they typically give a zero percent risk weighting if you are exposed to another group member," said Alan Bainbridge, partner at Norton Rose Fulbright in London. "The PRA is not retaining that [measure]. So the ring fence is going to have to have extra capital as a result," he added.

Most universal banking groups have always sought to factor into their capital planning the likelihood that the measure would be removed, but it will hit some banks more than others. "The biggest impact will be on the institutions with large investment banking arms rather than those which have shifted their focus to the retail market," said Bainbridge.

Others are less concerned about the move. "This is just applying the provisions of the CRR in a way that recognises the ringfence. Intragroup concessions are not allowed because otherwise the ringfence would be effectively non-existent, it would be argued," said one London-based partner.

KEY TAKEAWAYS

  • The UK’s PRA has released its latest consultation paper for ringfencing the country’s biggest financial institutions;
  • Of chief concern is how the in-scope banks are going to meet the intragroup exposures between the ringfenced and non-ringfenced side;
  • Despite this, there is good news. Banks will be able to transfer capital from their retail arms to other parts of the business in the form of dividends;
  • The consultation period ends on January 15. The deadline for in-scope banks’ so-called near final plans is January 29 2016, a deadline that some believe is unrealistic.

Aggregate figure

Elsewhere in the consultation, the Prudential Regulation Authority (PRA) conceded that the policies in the paper could increase firms’ capital requirements, surprising some by attaching a figure to this so-called aggregate cost.

'The PRA has estimated that the application of Pillar 2A…on a sub-consolidated basis and the effect of not granting large exposures permissions between ring-fenced bodies (RFBs) and an RFB sub-group…could increase total capital requirements by £2.2 to £3.3 billion in aggregate,’ states the paper.

Some industry participants have been surprised by the figure. Even at the top end of the PRA’s estimates, £3.3 billion is comparatively minor when spread across all in-scope institutions. Consumer finance experts have predicted the costs will be passed onto customers, a point which lawyers refute.

Flexibility

Despite the changes on the large exposure permissions, Barney Reynolds, global co-head of Shearman & Sterling’s financial institutions practice believes the latest consultation is positive.

"I think the regulators are stretching the Vickers proposal to the maximum, and being as accommodating as possible in order to allow UK banks to compete on a more level footing with foreign institutions," he said.

The consultation period ends on January 15. In-scope banks’ so-called near final plans are due by January 29 2016 – a deadline that some believe is unrealistic.

"The question will be how final those near final plans are," said one partner. "Regulators can only deal with what they get and I think the banks are under a lot of pressure time wise to construct their capital business plans in a way that meets these new requirements. It’s not easy in the time available," he added.


"The biggest impact will be on the institutions with large investment banking arms"



The consultation comes at a time when UK regulators appear to be softening their stance on previous rulemaking. The paper was released just a day after the UK Treasury announced its intention to scrap the most contentious part of its senior managers regime, a new framework designed to hold top-level executives to account.

In a last-minute U-turn, the Treasury said it would remove from the bill the principle of the reversal of the burden of proof, which would have, in effect, seen senior managers treated as guilty until they could prove themselves innocent.

See also

UK ringfencing opposition lingers

Bank of England may raise countercyclical buffer

Banks divided over senior managers seeking legal advice

 


 

 

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