"Ring-fencing is the second biggest piece of post-crisis regulation to hit the UK banking industry..."
From tomorrow UK ring-fencing requirements officially come into force, meaning all systemically important UK banks have to separate their traditional retail services, like deposit accounts and mortgages, from their more complex investment banking offerings, such as foreign exchange or derivative trading. Jon Holt, Head of Financial Services, KPMG UK, explains what this means for the sector in 2019 and beyond:
“Ring-fencing is the second biggest piece of post-crisis regulation to hit the UK banking industry - it comes second only to MIFID II and supersedes Brexit in cost, complexity and resource. It is yet another example of the UK regulator forging ahead with its ambitions to make the UK’s banks as safe as possible.
“However, non-UK banks could be well placed to benefit as, not being subject to ring-fencing, they will hold less additional capital and can also still use retail deposits to fund lending. European, US and Asian banks are active in the UK and are showing real demand to pick up any slack in our corporate lending market.
“International banks will also be at an advantage when it comes to risk diversification. Every systemically important ring-fenced retail bank in the UK will be entirely tied to the fate of the UK economy – which could be rocky over the next few years. Banks operating in different countries can afford for profits in one region to dip, if they’re doing OK in another region. However, this is not something that has escaped the regulator’s attention.
“Ring-fencing could also have an impact on the maturing challenger, digital and start-up banking sector as the UK now has five new big banks purely focused on UK retail customers. I expect to see an increase in competition for current accounts, mortgages and customer service. Their extensive customer bases and relatively deep pockets will make the big five ring-fenced retail banks fierce competition for our newer banks.
“We’ll soon see whether our challengers have done enough in the last decade to stand up to the competition they’ll face in the next.”
See more about ring-fencing on the PRA website here.
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About KPMG in the UK
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 16,300 partners and staff. The UK firm recorded a revenue of £2.338 billion in the year ended 30 September 2018. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.