Natwest and Lloyds to cash in as Reeves hints at ring-fencing reform
Rachel Reeves has told top bank bosses she is “open-minded” to ditch the ring-fencing regime imposed on major banks.
The Chancellor was lobbied by the chiefs of HSBC, Lloyds, Natwest and Santander to scrap the 15-year-old legislation last month.
Lenders slammed the system – which requires firms to keep their retail bank operations separate from their investment bank – as “redundant” and obstructing the firm’s “ability to support business and the economy” in a letter to Reeves in April.
And Reeves has since said: “Officials are considering the issues” and proposed further discussions.
“Banking is at the heart of the UK’s financial services sector and plays a vital role in supporting growth across the UK economy and will be crucial to the success of the government’s industrial strategy,” Reeves wrote in a letter obtained by Sky News.
CityAM reported last week Natwest and Lloyds would be in line for a major cash bump if Reeves was to meet lenders’ demands.
RBC analysts projected a “blue sky” scenario would include a banking sector benefit of around £2.5bn. In a base case, savings top £1.5bn, with Natwest leading the pack as the biggest beneficiary.
Natwest would receive a £530m boost, “due to the larger funding cost gap between the ring-fenced back and non-ring-fenced back”, analysts Benjamin Toms, Anke Reingen and Pablo de la Torre Cuevas said.
The figure represents seven per cent of Natwest’s projected pre-tax profit for 2026.
Analysts said HSBC and Barclays would “benefit, but to a lesser degree.” Barclays would be set to save £240m and HSBC £300m.
Barclays’ boss: Ring-fencing should not be scrapped
But in a departure from representations made by his FTSE 100 peers, Barclays boss CS Venkatakrishnan launched a staunch defence of ring-fencing in April.
The bank’s chief said he didn’t think the regulation “should be relaxed or scrapped.”
He argued: “There are two counterpoints: we have spent the money on the set-up and we make it work; but the more important fact is that you have to weigh against this the immense amount of depositor protection that the ring-fencing regime gives the country.”
The regime dates back to the financial crisis, where regulators sought the need to separate a bank’s everyday services, like taking deposits and offering loans, from its riskier investment activities, such as trading.
It was mandated in the Financial Services Act 2013 and created a legal ‘firewall’ around retail banking to ensure savings and access to banking services were protected in the event other parts of the lender failed.
UK banks with more than £25bn in core deposits are required to ring-fence their retail operations from riskier activities.