Treasurers should not assume that banking with a ring-fenced bank is safer than banking with a non-ring-fenced bank once new legislation takes effect in 2014.
This was the message from speakers who addressed the ACT’s breakfast update on regulatory matters in London on 6 November, which was held under the Chatham House Rule.
Under the Financial Services (Banking Reform) Bill, UK banking groups will have to separate their retail banking arms from their riskier investment banking activities by introducing a ring-fence around the deposits of individuals and small- and medium-sized businesses. Meanwhile, depositors that are protected by the Financial Services Compensation Scheme will be given preference over large corporates in the event that a ring-fenced bank becomes insolvent.
In comparison, the claims of a corporate will rank pari passu with those of other unsecured depositors should a non-ring-fenced bank fail. “You will need to think hard about whom you deposit with,” treasurers were told. “Wholesale deposits will be hot money. You need to pay attention.”
Treasurers learned that ring-fenced banks are likely to provide most of the lending and transaction banking that corporates need. They will also offer simple derivative products. But ring-fenced banks cannot sell complex derivatives or options, engage in trading activities or lend through branches based outside the European Economic Area. As a result, their credit ratings are likely to be higher than those of their non-ring-fenced counterparts.
Sally Percy is editor of The Treasurer