UK banks face loan ring-fencing challenge


By Alasdair Reilly

LONDON, Sept 29 (Reuters) – Ring-fencing regulation is increasing the cost and cutting the profitability of syndicated lending for UK banks, which is prompting some UK lenders to exit relationships with British companies and helping foreign banks to increase market share.

UK banks with deposits of £25bn or more must separate essential banking services from more risky investment banking services from January 1 2019. The rules are intended to help protect the UK economy and banking sector, but come at a cost.

The reforms are boosting the cost of syndicated lending, as banks will no longer be able to use retail deposits to fund deals and will instead have to capitalise syndicated lending by using their own equity at a higher cost.

The situation is being exacerbated by Brexit. UK banks are less able to lend to UK companies at a time when their services are more in demand, which, ironically, could leave UK firms more reliant on eurozone and other international lenders.

“In a post Brexit environment, you might not be able to rely on UK banks to fund UK companies. European banks will be funding UK corporates more and more,” the senior banker said.

Banks are working on putting ring-fencing arrangements in place, but the impact is already starting to show as bankers try to guess the returns that they will need in the new environment, before the ring-fenced balance sheets are in place.

Under the old relationship banking model, investment-grade lending has been a loss-leader designed to net more lucrative business.

With a higher cost of capital, UK banks are now squeezing clients harder for business, pricing themselves out of the market or pulling out of deals if returns are too low.

“They [banks] need higher returns, ancillary business won’t cut it, clients will be priced higher and they will say ‘we don’t need you,'” the senior banker said.

International banks are waiting to replace UK banks that are dropping out of deals. Some UK companies are also trying to cut the size of their bank groups to increase the ancillary business on offer.

Brexit also means that many large UK firms are actively looking to make their banking relationships more international to diversify their sources of funding.

Banks are currently working on how the ring-fenced and non-ring-fenced banks will interact and provide services to each other, while showing the regulator that the two entities are independent.

“The way we behave will not change. We have to show the regulator that we have formally separated ring-fenced and non-ring-fenced activities, that the relationship is arm’s-length and there is no merging of responsibilities,” a second senior banker said.


Ring-fencing regulation is giving international banks an ideal opportunity to gain a major foothold in the UK syndicated loan market at the expense of incumbent UK clearing banks, including Barclays, Lloyds, and NatWest.

European, US and Asian banks are becoming more active in the UK syndicated loan market as a result. BNP Paribas announced earlier this year that it was looking to grow the number of its clients in Northern Europe.

Unhampered by ring-fencing regulations and buoyed by cheap ECB liquidity, European banks have a distinct advantage over their UK peers. Chinese, Japanese and Taiwanese banks are also seeking to grow market share.

Santander and HSBC are scenting opportunity, as both banks benefit from having substantial non-UK deposits and can use non-UK balance sheets with a lower cost of capital and return than other UK banks to capitalise lending.

Santander UK will become Santander’s main ring-fenced bank in the UK, serving all its UK personal and business customers. Santander Group can provide any products that the ring-fenced bank cannot offer under the regulations.

Meanwhile, HSBC will create a new ring-fenced bank, HSBC UK, that will include personal and commercial customers in the UK. The non-ring-fenced bank, HSBC Bank PLC, will include all the bank’s global banking and markets customers within its wholesale and investment banking division.

At Royal Bank of Scotland debt capital market and syndicated lending for corporate customers and financial institutions will be outside the ring-fence. RBS will hold ‘take and hold’ positions on its balance sheet inside the ring-fence, while underwritten positions for distributing to the wider market will be outside.

Barclays will set up a ring-fenced bank in the first half of 2018, which will operate alongside, but independently from listed entity Barclays PLC. The ring-fenced bank will provide banking services to individuals and smaller businesses in the UK.

The non-ring-fenced bank Barclays Bank PLC will provide products and services to larger corporate clients, wholesale and international banking clients.

Lloyds Bank, which is now primarily a UK-focused retail and commercial bank rather than an investment bank, says that the impact of ring-fencing will be relatively limited.

The current accounts, savings and deposits activities of Bank of Scotland, Lloyds Bank and Halifax will sit within the ring-fenced bank, while a new non-ring-fenced bank, Lloyds Bank Corporate Markets, will include loan market activities within Commercial Banking Markets Financing.

Lloyds estimates that around 97% of group loans and advances will sit within the ring-fenced bank.

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