The Independent Commission on Banking (ICB) has recommended that UK banks erect a ring-fence around their core retail operations from riskier investment activities including loans to private equity firms.
The report took a cue from the US Volcker rule (part of the Dodd-Frank Act) which restricts US banks from investing with private equity and hedge funds. “Those activities prohibited by the Volcker rule should be prohibited from ring-fenced banks,” said the report.
The concern is whether the ring-fencing will result in banks charging higher prices for their wholesale operations which will have a smaller pool of capital to draw from.
Up to £2.3 trillion of assets, or one third of the UK banking sector’s total assets, could end up inside the 'firewall', according to ICB estimates.
The large majority of private equity firms are already served out of bank’s wholesale investment divisions, said Lucy Frew, an investment fund and regulatory specialist at law firm Gide Loyrette Nouel. The concern is whether a ring-fence will result in banks charging higher prices for their wholesale operations which will have a smaller pool of capital to draw from, she added.
The 360 page report can be accessed here.