Is it time for the banks to breathe easier? Following the summer Budget's tapering of the bank levy for the major lenders, the Prudential Regulation Authority (PRA) has suggested ringfencing rules that are as lenient as the banks could reasonably have hoped. Little wonder, then, that shares in Barclays (BARC) and RBS (RBS), two companies with some work ahead to meet regulatory demands, rose after the consultation was issued.
The major wins for the banks include the ability to distribute profits from their retail operations to elsewhere in the group, as long as the ringfenced body contains "sufficient capital resources" and the regulator is notified. Lenders had been concerned profits would be trapped in their retail operations. The proposed rules will also allow the ringfenced banks to transact with other group entities, as long as they are treated on equivalent third-party terms. This will allow for the cross-selling of products as well as intragroup lending. Following some lobbying, the PRA is being nowhere near as draconian as some in the industry had feared.
Banks are required to submit to the regulators by January next year "near-final" plans on how they will comply, ahead of the implementation of the ringfence in January 2019. There is much to do - for example, the rules still require a separate governance structure including an independent board with its own risk and audit processes. There are also details to be ironed out about how the global requirements for 'loss-absorbing' capacity will work across the different entities.