We support HMT’s intention to improve the functionality of the ring-fencing regime in the near-term by relaxing certain aspects and remedying some unintended consequences and the intention to implement these reforms swiftly.
However, we are concerned that the near-term reform themselves create some unintended consequences, including:

• The expansion in the geographic scope of “core deposits” would bring certain banks into the ring-fencing regime for the first time and impose considerable unnecessary costs, cause disruption to the depositors concerned, impair the funding and liquidity positions of affected banks, with associated safety and soundness risks, and create a considerable risk to confidence in UK banks and financial stability.
• Permitting RFBs to incur exposures to Relevant Financial Institutions (RFIs) which qualify as investment firm small and medium sized enterprises (SMEs) only is very limiting; we consider that RFBs should be permitted to incur exposures to all SMEs.
• The proposed definition of SMEs is too complex; we have proposed an alternative definition, in line with that applied by the Basel committee, which is simpler and more straightforward to implement.
• The proposals relating to foreign exchange contracts and derivatives are narrowly drafted and would not generally enable ring-fenced banks to support their clients’ hedging and risk management strategies.

We urge HMT to carefully consider their approach to implementing the near-term recommendations to improve the operational efficiency of the ring-fence and to ensure they are simple to execute.
If it is too complicated or introduces additional implementation burden, the effect of the reforms will be less beneficial or in extremis not applied.