The UK Treasury has announced plans to revise its ring‑fencing regulations that separate large banks’ core and non‑core functions in order to reduce costs for big banks.

The Bank of England’s Prudential Regulation Authority (PRA) will publish a consultation in the summer proposing to allow firms to more flexibly share resources across the ring‑fence. The reforms will seek to “streamline” requirements for major financial institutions, unlocking new flexibilities and cost savings for the firms.

The PRA said these reforms may include making it easier for firms to “utilise operational services, such as data‑processing services, information technology and back‑office functions, across the group”.

Ring‑fencing is a requirement for banks that have £35 billion or more in core deposits to separate their core retail activities from investment banking ones. This was brought into force in 2019 as a response to the 2008 financial crisis, in which several large banks failed due to poor investment decisions, collapsing both their investment banking divisions and their consumer lending and savings ones.

Five banking groups are currently subject to this legislation: Barclays, HSBC, Lloyds, NatWest and Santander UK.

The PRA claimed it is now possible to reform this area while maintaining safety and resilience due to other advances in its toolkit since the ring‑fencing regime was brought into force six years ago.

This consultation forms part of a package of reforms announced today by the Treasury, which the PRA said was produced in close collaboration with the Bank and PRA.

In the Treasury document’s ministerial foreword, economic secretary to the Treasury Rachel Blake said the reform “retains the foundations of the regime, preserving important financial stability protections, while remodelling them to be more flexible and responsive to changes in the economy, financial markets and the wider prudential and resolution regimes”.

These reforms bring sweeping change to the ring‑fencing regime, with five key goals, according to the document: creating a more agile and proportionate ring‑fencing framework; allowing ring‑fenced banks to provide more products and services to support the UK economy; addressing inefficiencies in how ring‑fencing is applied to banking groups; sharing resources and services more flexibly across the ring‑fence; and maintaining proportionality.

The package of reforms contains a large set of changes, including moving aspects of the ring‑fencing regime out of the hands of parliament and into PRA rules, which the Treasury said will create “greater scope for the PRA to use modifications and waivers”.

Other flagship reworks include a “New Growth Allowance”, which will allow ring‑fenced bodies to undertake activities that are otherwise prohibited under the regime. Under this allowance, banks could be allowed to use up to 10 per cent of their Pillar 1 capital to provide business lending services worth up to £80 billion, which the Treasury says will support the country’s high‑growth scale‑ups and financing for infrastructure.

Other deregulation under consideration includes increasing the number of derivatives products that ring‑fenced banks (RFBs) can offer to clients to avoid “unnecessary friction” and allowing RFBs to lend to other non‑ring‑fenced financial institutions. The Treasury notes in its document that “interlinkages within the financial system are associated with higher levels of contagion and systemic risk”, but says it will consult on “an approach to permit exposures to firms which offer services that can already be performed by the RFB”.

The Financial Stability Board recently published a report warning that the interlinkages between commercial banks and private credit posed serious risks to the stability of the global financial system.

The government is also intent on continuing to review the threshold for ring‑fencing, which currently only regulates the five largest banking groups in the country. Last year, it took “a decisive step forward” in raising the core deposits threshold from £25 billion to £35 billion, the document said, and it is committed to reviewing this figure every three years in order to reflect evolving banking practices and deposit‑base growth.

Industry Reactions

The response from banks has been positive, if muted.

Mahesh Aditya, chief executive of Santander UK, said: “The proposed changes are a positive step in the right direction in helping strike the right balance between maintaining the strength and resilience of the UK financial system while also enabling banks to do even more to support growth, investment and jobs across the country.”

Paul Thwaite, chief executive of NatWest Group, said in the Treasury release that: “We welcome today’s announcement and the opportunity to develop a simpler, more flexible and proportionate ring‑fencing framework that can better support UK economic growth.

“These changes have the potential to increase lending and investment, in line with the government’s wider ambitions of helping to unlock growth for households and businesses in every region and nation of the UK.”

Barclays told FStech it had nothing specific to add.

HSBC did not immediately respond to a request for comment.

The reaction has not been wholly positive, however. Richard Murphy, founder of Tax Research UK and Emeritus Professor of Accounting Practice at the University of Sheffield Management School, told FStech that this policy is “not about bankers, it is about being bonkers.”

Yesterday, he wrote on his long‑running Funding the Future blog that the regulation is “a reversal of regulations put in place to prevent a recurrence of the 2008 global financial crisis”, adding that “the timing could scarcely be worse” for these changes due to ongoing political instability leading to instability in the market.

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