In a move which is likely to influence the price of lending to private equity, the UK’s Independent Commission on Banking this week recommened banks “ring-fence” retail services from riskier wholesale investment operations.
Aiming to prevent another taxpayer bailout of banks, the proposal calls for retail banking operations to be managed by a separate subsidiary within the wider banking group. Colin Ellis, chief economist at trade body the British Private Equity and Venture Capital Association, said the report seemingly defined retail banking activity as retail deposits and loans to SMEs.
However it is unclear whether private equity-led acquisitions of small UK business would be treated differently (due to perceived risk) and consequently outside of the ring-fence, Ellis added.
I suspect SMEs owned by private equity funds will be outside the ring-fence, even though in practice the only difference between the two models is ownership
Jonathan Herbst, a partner in law firm Norton Rose’s Financial Services Group, said: “If the policy is to encourage small and medium sized businesses it would seem appropriate to include private equity funding structures in retail.”
Banks could only lend capital pulled from retail deposits for activity defined within the retail subsidiary, the report proposes.
“I suspect SMEs owned by private equity funds will be outside the ring-fence, even though in practice the only difference between the two models is ownership,” added Ellis.
The commission’s final report will be submitted to the UK Treasury in September.