U.K. Banks May Need $5.1 Billion of Capital for Ring-fencing

The U.K.’s largest banks may face higher capital requirements under Bank of England rules on the separation of retail operations from riskier investment banking.

The BOE’s Prudential Regulation Authority estimates that so-called ring-fencing could mean an additional capital requirement of 2.2 billion pounds ($3.4 billion) to 3.3 billion pounds by 2019, when the rules kick in.

The move is aimed at ensuring that financial services crucial to the U.K. economy, such as deposit-taking, payments and overdrafts, will be protected if riskier units incur losses and have to be shut down.

The additional burden is due to the protected unit being measured on a standalone basis for its capital needs. In addition, any transactions between the ring-fenced unit and other parts of the institution will be classed as third-party deals, meaning capital will have to be held against them.

“The PRA recognizes that applying this approach may result in increased capital requirements for some firms,” it said in a consultation paper published in London on Thursday.

The rules will probably apply to HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc, Barclays Plc, Santander U.K. Plc and Co-operative Bank.

Barclays shares jumped as much as 0.9 percent after the announcement and traded at 246.70 pence at 9:37 a.m. in London, up 0.3 percent. HSBC, Europe’s largest bank, rose 0.7 percent to

519.1 pence, while RBS advanced 1.1 percent.

Ring-fenced banks will have to be able to show regulators that they are complying with the rules, with a single firm inside the firebreak taking responsibility for demonstrating it, the PRA said.

‘Critical’ Services

The PRA also said it plans to allow some exceptions to regulations prohibiting a ring-fenced bank from carrying out certain activities.

In another paper, the regulator suggested how a bank can ensure continuity of services in the event part of it fails. These involve managing “critical” shared services such as IT functions in a way that allows business to continue. The PRA estimates one-off costs of about 5 percent of total operating expenses to meet the new requirements, plus ongoing annual costs of about 3 percent.

While the PRA said banks may try to pass on higher costs to customers, this will depend on other factors, including competition and new entrants to the banking market.

The PRA also said it will allow dividend payments from the ring-fenced unit to the parent group so long as it can demonstrate the payment won’t undermine its capital strength.

The regulator’s proposals stem from the 2011 recommendations of John Vickers’s Independent Commission on Banking, part of the government’s efforts to strengthen the industry after the financial crisis.

“Making our firms more resilient has been at the forefront of our post-crisis reform agenda,” said Andrew Bailey, chief executive officer of the PRA. The proposals “will enable firms to take substantial steps forward in their preparations for structural reform.”

Before it's here, it's on the Bloomberg Terminal.