The Bank of England revealed this morning that the UK’s main banks, Royal Bank of Scotland (LSE: RBS), Lloyds Banking (LSE: LLOY) Barclays (LSE: BARC) and HSBC (LSE: HSBA), only have three months left to submit plans, detailing how they will ringfence domestic retail banking operations.
These ringfencing demands are designed to protect the domestic high-street banking arms of each bank, separating them from riskier parts of the business. It’s believed that this will help prevent a repeat of the taxpayer bailouts, brought on by excessive risk taking at investment banking divisions during the financial crisis.
Plenty of uncertainty
While the BoE has demanded that HSBC, RBS, Barclays and Lloyds submit plans for ringfencing before the end of the year, there’s still much uncertainty about what type of structure the new ringfenced businesses will take.
It’s claimed that banks are still unaware of the capital requirements for ringfenced entities. Further, managements are still seeking clarification on what level of interaction the retail side of the business will be able to have with the investment bank.
Unfortunately, the BoE has not clarified these issues. Instead, the central bank has stated that these sticking points will be clarified after separation plans are submitted.
Additional capital
Still, it’s likely that the ringfenced side of each UK bank will be forced to hold more capital that the investment side. After all, the main reason for the ringfencing is to reduce the risk of another financial crisis; a crisis caused by excessive levels of leverage and low levels of capital.
With this being the case, it’s likely that HSBC, Barclays, RBS and Lloyds could all be forced to raise additional capital at some point during the next few years, in order to meet leverage targets. RBS and Barclays are already struggling to meet current capital targets, so they could be required to raise fresh capital.
For example, after launching a rights issue last year to bolster capital levels, Barclays continues to seek “further leverage reduction opportunities”. Additionally, the bank is facing billions in possible fines and legal battles with regulators.
Meanwhile, at the end of September RBS did report that its tier 1 capital ratio had hit 10.1%, from 8.6% at the end of 2013. However, RBS’s management remains cautious and expects legacy issues to impact capital levels going forward.
Strong position
Compared to RBS and Barclays, HSBC and Lloyds are in a relativity strong position. HSBC for example can call of reserves from other regions around the world to boost its UK capital position.
Lloyds has reported a sharp increase in its capital position over the past few years. The bank’s tier 1 ratio stood at 11.1% at 30 June, up from 10.3% at the end of 2013. What’s more, the bank’s drive to simplify operations, moving away from risky investment banking will help reduce ringfencing costs. So what should you do next? Well, before you make any trading decision I strongly advise that you take a closer look at Barclays, HSBC, Lloyds and RBS.
