Britain to relax capital requirements for retail banks to promote competition

Britain’s finance ministry is planning to ease rules on “ring-fencing” for banks’ retail arms with a capital reserve, in a bid to boost competition in the banking sector. The proposed legislation, which is part of the government’s response to a review led by Keith Skeoch, would increase the threshold at which ring-fencing applies to banks from £25 billion to £35 billion. The aim of the ring-fencing rule, introduced in 2019, is to ensure the safety of deposits even if riskier investment banking activities lose value. The changes would make the rule more adaptable and support small and medium-sized enterprises, according to UK financial services minister Andrew Griffith.

The proposal also includes allowing ring-fenced banks to set up entities outside the UK to compete with both domestic and international banking groups. UK Finance, an industry body, has welcomed the move, stating that it would enhance customer choice and improve competition. However, it also urged the government to review the long-term need for the ring-fencing regime, considering the significant changes in bank resolvability since its introduction in 2019. The government plans to put forward secondary legislation for implementing the reforms in early 2024, with the changes taking effect once they pass through parliament.

Meanwhile, the Bank of England has published a consultation paper suggesting a new rule that would require a ring-fenced bank to ensure that any branch or subsidiary outside the UK does not pose a significant risk to the provision of core services in the country. The goal is to maintain stability in the banking sector while allowing banks to operate more flexibly across borders. These proposed changes to the ring-fencing rules aim to promote competition, improve outcomes for banks and customers, and increase the competitiveness of the UK banking sector.

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