Ringfencing & Resolution (23/22)

Starting on 16 March 2020, I began writing daily blogs about the impact of the Covid crisis on financial regulation, and this has extended into commentary on regulation generally.

In the end, there was only one point of significant disagreement between the two witnesses at yesterday's TSC session on the Edinburgh Reforms.

But it might still provide sufficient political wriggle room for a deregulatory Government to start unpicking the post-financial crisis regulatory framework, should it choose.

The witnesses were Sir John Vickers and Sir Keith Skeoch, respective Chairs of the Independent Commission on Banking that recommended the ringfencing of major UK retail banks, and of the Review of the ringfence arrangements that reported last year.

The difference was over the Skeoch Report's suggestion that, ultimately, the protection provided by ringfencing could be "overtaken" by an effective Resolution Regime, rendering the ringfence unnecessary.

Skeoch made clear that, for the largest, most complex banks, this was a very high hurdle, but also that this was a desirable direction of travel. He described ringfencing as "a very useful planning tool", which felt like faint praise, and pointed out that resolution was structure-agnostic. Ringfencing isn't, by definition, and he argued that this could create a problem if a ringfenced entity proved hard to sell in a resolution situation.

Unsurprisingly, Vickers disagreed.

Ringfencing, resolution, and higher/better capital requirements should be seen as mutually reinforcing elements of the "fundamental" post-crisis framework. Much higher capital requirements might reduce the need for the other two, but in their absence all were necessary.

As well as assisting the resolution process, including by providing the authorities with several options they didn't have during the crisis, he felt ringfencing offered other important benefits. Including: (i) a degree of insulation from (global) shocks; (ii) cultural benefits, such as the retail bank being separate from investment bank risk-taking; and (iii) the ability to set different capital requirements.

He also questioned the wisdom of relying on resolution working "for sure".

At the end, however, they implicitly agreed that there were probably circumstances in which we couldn't rely on "bail-inable" capital during a resolution situation, particularly if, as in 2008, more than one institution was involved.

Nevertheless, it will be worth watching to see whether the Government looks to exploit their differences to justify weakening the fence.

The overall session was a good example of what a future scrutiny role could look like. It was again a shame, however, that not all TSC members were present, and the possibility of the voting bell sounding sometimes overshadowed the questioning.

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