Ring-fencing retail banks to cost up to £7Bn

The cost of ring-fencing retail banking operations in the UK could be as much as £7 billion, according to HM Treasury, but the effects on systems and processes will be wide-ranging and unpredictable.

With the publication of a White Paper this week, the UK Government confirmed that it will implement the ring-fencing proposals of the Independent Commission on Banking, with some modifications, by the 2019 deadline. All necessary legislation will be passed in the lifetime of the current parliament. Barring an early election, that means 2015.

The British Bankers' Association "welcomed the way the government's plans had evolved to make its proposals more workable" but chief executive Angela Knight said there were three key outstanding questions:

• how reform will affect banks headquartered in the UK but working largely outside it
• how banks can be assured they will not be subject to competing and different reforms
• the actual scale of the costs involved

 "The Chancellor has carefully walked the tricky path between making changes that give greater safety and security, while not making the burdens so great that it would be difficult for banks to operate effectively in the interests of their customers and of the economy," Knight said.

"At first glance, these refinements have removed many of the obstacles from the original report that, if left in place, would have hampered the banks from providing important services such as finance for mid-sized companies and trade finance for exports and from maintaining the international wealth management services so vital for our country. However, the costs to the banks - not including those of transition - are very substantial running anywhere between the Treasury's estimate of £4 to £7 billion a year.

"This leaves three big questions. First, we need to work out how today's reforms will affect those banks which have their headquarters in the UK but which operate largely outside our shores. We are pleased the capital proposals are now aligned internationally but we still need assurances that banks will not face the double-whammy of different and competing reforms. Lastly the bill is a big one and we do not yet know what the impact of this will be."

Satish Swaminathan, senior principal of capital markets at Infosys, said there are wider structural and process changes that banks will need to make to accommodate the regulations.
He believes the technological impact on the processes within banks include the need to segregate trade flows that are currently intertwined across multiple entities and systems, increased overhead on trade processing because of the need to create an audit trail for hedging transactions, and a huge impact on reference data because of the need to segregate of entities and accounts.

"The biggest challenge is going to come from the fact that transactions are so intertwined that it is hard to tell what is a hedge and what isn't," he said.
In many ways, he said, the UK is implementing a version of the US Volker Rule, which is good in some ways, as it means that there is a broad alignment of international regulations, but the UK proposes to allow some use of derivatives for hedging purposes by banks operating inside the ring-fence.

Swaminath said that the costs of ring fencing are going to be very high, based on the empirical data from the implementation of the Dodd-Frank regulation in the US. The average cost for US banks is put at $20 million, with larger banks having to spend as much as five times that, he said.

With costs like this, it is very important that as much uncertainly is removed as possible, he said: "people don't want to have to spend a tone of money to be compliant, only to have to spend another ton of money because the interpretation changes down the line".

Extract taken from:

http://tiny.cc/w198fw