As part of the UK Government’s Edinburgh Reforms, Chancellor Jeremy Hunt announced last December that it would consult on reforms of the ring-fencing regime for banks in mid-2023 with the objective of improving its functionality, while moving some firms out of it entirely.
Ring-fencing, introduced in the aftermath of the 2008 global financial crisis, separates a bank’s retail operations from its investment banking division in order to safeguard the core retail division from external shocks. It covers banks with deposits totalling more than £25bn.
The UK Government has proposed increasing the threshold by which the ring-fence applies to banks from £25bn to £35bn in deposits, removing some smaller banks from the regime. However, some experts have suggested that SVB’s fallout on Friday (10 March) might make this politically unfeasible.
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“I think it will be very difficult for the government and regulators to argue that the [deposit] threshold should be increased after the problems SVB have had. Politically at least, it becomes very difficult to do that,” said Gavin Haran, head of asset management policy at law firm Macfarlanes.
In the US, changes to the Dodd-Frank Act under former President Donald Trump raised the threshold at which banks are considered systemically risky and subject to stricter oversight to $250bn from $50bn. As at the end of last year, SVB had $209bn in assets.
“SVB is alleged to have lobbied to increase the threshold that applies to Global Systemically Important Banks (G-SIBs) and to have managed its assets to stay below the threshold,” Haran said.
“The concern is that remaining below the threshold resulted in SVB evading regulatory scrutiny into the poor management of its balance sheet.”
The government has also proposed to change the capital treatment of banks’ non-performing loans, and to give building societies the ability to rely more on wholesale funding and, as a result, to better compete with retail banks.
According to Haran, there might now be a pushback against any attempts to remove smaller banks from regulations that are designed to reinforce financial stability.
While the impact on the government’s approach to reforming financial regulation is uncertain, Jeremy Whiteson, restructuring and insolvency partner at law firm Fladgate, said it would be “unsurprising” if regulators and government slowed down steps to loosen regulation for any categories of financial institution.
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“The problems at SVB take away one of the fairly select number of regulated banks in the UK and the authorities will probably be worried about the strength of other smaller lenders,” he said. “In that context, they will be likely to exercise caution to protect the remaining banks in as safe an environment as they can.”
Moreover, Robert Dedman, partner at law firm CMS, said that once the dust has settled, the City of London will likely see pressure on regulators, possibly via the capital and liquidity framework, to prevent banking services for one industry being overly-concentrated in a single institution.
On Monday (13 March), President Joe Biden said he would ask the government to tighten regulations on the banking sector in line with the Dodd-Frank law introduced by the Obama administration, which the Trump administration partially relaxed in 2018.
“I am going to ask Congress and banking regulators to strengthen the rules for banks to make less likely this kind of bank failure would happen again,” he said in a televised speech.