UK financial regulation architects warn against scrapping ‘ringfencing’

Two architects of the UK’s post-crisis financial regulation have warned against the “reckless” abandonment of rules forcing the separation of big banks’ retail and trading divisions, after an independent panel suggested “ringfencing” could be replaced by measures ensuring banks can fail safely.

The Treasury-commissioned Skeoch report said last week that the three-year-old ringfencing regime designed to protect savers’ money from trading blow-ups should be retained for now. But it also argued for the potential exclusion of some banks on the basis that they were “resolvable”, a term that means they could fail with minimal public harm.

The report said that, in the longer term, measures to ensure banks are resolvable should play a “more prominent role” than ringfencing, paving the way for the costly separation of banks’ operations to be abandoned in favour of newer measures that protect taxpayers through provisions such as the forced conversion of some bonds to equity, a process known as “bail in”.

A UK Treasury and Bank of England task force will now consider the recommendations on the future of the regime for banks with more than £25bn in deposits, a group that currently includes HSBC, Barclays, Lloyds, NatWest Group, Santander, Virgin Money and TSB.

“If anybody in the world believes bail in will work, it is me,” said Sir Paul Tucker, a senior fellow at Harvard University who was Bank of England deputy governor from 2009 to 2013 and…