Pressing ahead with the recommendations of the Independent Commission on Banking is likely to make the UK’s core retail banks safer, Fitch Ratings states.
On Monday, chancellor George Osborne confirmed that the commission’s suggested changes to the UK banking system, which include ring-fencing retail banking from riskier investment banking operations, will be implemented.
Fitch says it is still too early to determine how the changes will affect the ratings of individual banks, as further details such as where the ring-fence sits within each group and the capital positions of different divisions will be needed.
However, the agency states that the reforms are consistent with regulatory momentum to reduce the need for further bailouts in the future.
“We believe the plan to ring-fence retail and other relatively low-risk banking operations should give them more stable ratings through the economic and market cycles,” Fitch says.
“The credit profile of a ring-fenced bank will be supported by its retail/[small and medium-sized enterprise] franchises, relatively low-risk secured lending and limited treasury activities.”
The agency also says the implications of banking operations outside of the ring-fence – namely wholesale and investment banking and possibly larger corporate accounts and private banking – are “more mixed”.
“The elimination of any current funding benefits from retail operations will be negative, but will be partly balanced by the reinforced trend towards stronger capitalisation.”
It adds that this is most likely to affect Barclays and Royal Bank of Scotland (RBS), which have “significant” investment banking activities. However, RBS is currently shrinking its investment bank and is expected to continue to do so.
In addition, Fitch predicts the move will increase rating variance in the banking sector. The ratings of different debt classes issued by a bank may widen depending if they are inside or outside of the fence, while parts of the same group could be given different ratings.
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