Banks are failing to explain how their ring-fencing plans are likely to affect corporate clients, according to a senior figure in the treasury profession.
Speaking to online finance journal Euromoney, Stephen Baseby – associate policy and technical director at the ACT – said that treasury teams are finding it hard to prepare for the impacts of ring-fencing on the companies they serve, because they have not been informed about which parts of which banks’ activities are going to change. Or how.
The issue at stake, Baseby stressed, is the sheer scale of the logistical challenge that corporates are sure to be up against – which means that their finance departments must have access to as many details as possible.
“Large corporates are facing embarking on a task with the complexity of Mifid II,” he told the journal – and, to illustrate the point, highlighted the example of one firm that is aware of the work ahead, saying: “We know of one big multinational corporation that expects to be required to change all of its sort codes.”
Baseby said that, in terms of standard frameworks for ring-fencing banks, the ACT has two types on its radar:
However, he notes, there is nothing to say that those models have not already been tweaked during individual banks’ talks with ring-fencing coordinating body the Prudential Regulation Authority.
“Treasurers have questions on what will happen to their documentation,” Baseby said, “and if they will be dealing with one entity, or two.”
In the event that it is two, he asked, “what is the credit relationship between them, and how will they know if their cash is with a counterparty, or a trading business where they would not want to take on the risk?”
Crucially, he pointed out, ring-fencing “creates the inability to have cross-relationships within groups that would normally be used to provide comfort”.
With that in mind, he warned, corporates “will need to look at their banking relationships, how they are related and the impact [that ring-fencing] may have. The whole process becomes messier.”
Ring-fencing was first proposed as a contingency against UK financial instability in an Independent Commission on Banking report of September 2011. The measures that Commission chair Sir John Vickers set out subsequently passed into law, with banks required to complete the necessary work by 2019.
The recommendations have proven controversial, though, with RBS chair Sir Howard Davies describing their enactment as nothing more than “a political decision, for political reasons”.
Baseby foresees one, potentially positive impact from putting the measures into practice – noting that regulators have expressed concerns to the ACT over how mid-sized companies tend to be dominated by one bank. “Ring-fencing could be the start of the break-up of this perceived monopoly,” he said.
However, he added, ring-fencing will affect SMEs in different ways. “This move to having multiple banks follows the trend of the larger corporates,” he said, “but they have enough business to pass around and enough people to keep track of what is going on.
“For smaller corporates that don’t have the same scale of business or workforce, they don’t, for example, want to have to keep repeating their credit position.”