Isolate regulations relaxed? British banks want to touch depositors' money, central bank says "No way!"

Sources say that the Bank of England is preparing to relax certain aspects of the UK bank ring-fencing regulations, but at the same time will oppose a major reform sought by banks. Currently, the UK government is reviewing the regulations, and the central bank is trying to ensure that core protection measures are retained during this process. Under the ring-fencing regulations, banks must separate their retail operations from activities such as investment banking. This is an important regulatory requirement in the post-financial crisis era, aimed at protecting depositors and taxpayers in times of crisis. UK Chancellor of the Exchequer Rishi Sunak promised "meaningful" reforms in July, as part of the government's efforts to reduce red tape and promote economic growth. These regulations apply to banks with retail deposits exceeding 350 billion, including Lloyds Banking Group PLC Sponsored ADR (LYG.US), NatWest (NWG.US), HSBC Holdings PLC (HSBC.US), Barclays PLC Sponsored ADR (BCS.US), and Banco Santander S.A. Sponsored ADR (SAN.US) UK branches. Critics argue that the ring-fencing regulations hamper the UK's international competitiveness and suggest that lifting the regulations could release capital for lending purposes. Sources from two banks stated that they have lobbied the UK Treasury, which has the final say on major changes, to allow the use of a portion of the 350 billion available in non-ring-fenced banks for funding activities such as investment banking. However, a source familiar with the matter said that officials from the Bank of England's regulatory arm - the Prudential Regulation Authority (PRA) - are opposed to such proposals, viewing it as "dismantling the ring-fence". The source added that the Bank of England would be willing to accept some smaller changes, such as allowing necessary back-office functions to be shared between two entities and allowing activities like plain vanilla derivatives trading within the ring-fenced entity. Changing the ban on shared services would be easier to implement, as it is part of the regulatory body's own rulebook. The PRA declined to comment, and the UK Treasury did not respond to requests for comment. "Second best" after abolishing the ring-fence Sunak, in his speech promising to reform the ring-fencing regulations in July, described regulation as a "constraint on business growth." Bank of England Governor Andrew Bailey disagreed with this characterization in the following week, defending the ring-fencing regulations and emphasizing that regulators "cannot compromise on fundamental financial stability issues." A senior executive at a commercial bank noted that these rules were designed before International Bancshares Corporation expanded its retail business in the UK, citing JPMorgan Chase as an example of a bank that has expanded its size in the UK with its retail bank but falls below the threshold in terms of deposits. Banks below the threshold can use deposits for activities like investment banking. An official from another bank described being able to tap into the 350 billion as a "second best" option in case the system cannot be completely abolished. A second source familiar with the matter stated that the PRA plans to propose its reform plan in early 2026 together with the Treasury. PRA Chief Executive Sam Woods was involved in designing the ring-fencing regulations that came into effect in 2019. His second five-year term will end in June. Barclays PLC Sponsored ADR has established separate service departments for its retail banking and investment banking, making it the only major UK bank supporting the current regulations.