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Not enough discussion has taken place about how banks should ring-fence different parts of their operation




By Richard Goold, Executive Director, and Alistair Catto, Principal, at transformation consultancy Moorhouse

Richard-GooldThe financial services sector as a whole is experiencing an enormously challenging time. In the face of multiple pieces of legislation from around the globe, compounded by often contradictory requirements, the industry is having to cope with an enormous amount of pressure and change.

This is especially true in the UK’s financial sector. A great deal of discussion has taken place recently concerning the ring-fencing of banking institutions and the separation of their operational entities. The UK Chancellor, George Osborne, has even stated that such a fence should be “electrified” with the threat of severe sanctions. If banks do not fully separate their retail and investment banking divisions, they face being split up by fresh government powers.

In reality, how easy is it for banks to carve out these two seemingly different parts of their operation and what implications does this have for customers? While the rhetoric is convincing and clearly communicates the urgency and drive from policy makers to challenge the banking industry to change, little has been said about how such a separation should be achieved.

Ring-fencing comes with its own set of problems. It will likely bring uncertainty for investors, and as a result banks may find it difficult to raise capital. This will compound the lending problems the sector is facing. A number of international regulators have questioned the need for ring-fencing as opposed to strengthened balance sheets, stating higher capital and liquidity requirements are more important for stabilising banks than the separation of proprietary trading and deposit-taking business. Whether intended or not, there is a risk that this move only compounds the existing perception of constricting regulation across the industry.

What is being suggested is a move away from the Universal Model of banking which is deeply ingrained within most diversified European banks. While the ring-fencing approach has been challenged as a strategy that may well stifle capital markets – and in fact deliver little in terms of risk mitigation – the critical aspects of exactly how the ring fence could be put in place has not been sufficiently debated.

Looking below the veneer of some of the recent legislation affecting UK banks, it’s self-evident that the primary focus is to ensure that these organisations better serve their customers, and reduce the risk faced by them and the taxpayer in the event of a crisis.There have been many obvious examples of corporate failure that have led to the call to split retail and investment banks. However, it is debateable whether this kind of ring fencing would in reality have really prevented either the UK bank bailouts or the collapse of Lehman Brothers. Most of the evidence points to poor decision making and reckless risk taking having a far greater impact.

Clarity on the required approach to ring-fence will be critical to ensure that banks can implement suitable regulatory mechanisms while maintaining Business As Usual (BAU) activities. Ring-fencing would most likely be achieved by segregating specific asset classes and liabilities into separate companies. While this is primarily a legal and financial treatment, there are likely to be wide ranging operational changes required to support the delivery of a ring-fenced business, compliant with requirements which genuinely supports a business that has reduced the threat of “moral hazard”.

In reality diversified banks dealing in both retail and investment banking would have to revisit their operating models and change their entire corporate structure dramatically to achieve the aims of the regulation, to do this without impacting the customer experience must be their first priority. By taking a customer centric view of the change and understanding how best to serve their customer base, the banks may well be able to gain competitive advantage in the short term during a period of highly disruptive change. Ring-fencing has to ensure that the interest of customers is paramount without adding an increased cost (or bureaucracy) to existing services as a result. This will, in essence,force banks to set up separate organisations under the same brand. Alistair-Catto

Some may question whether the ring-fencing of banks provides any benefits over the total separation of retail and investment banks. This highlights the need for the right governance; both from a compliance perspective but equally from an ability just to do business. This will require large-scale behavioural change for banks and whether the ring-fence is a success will be heavily dependent on the right level of regulation. Furthermore, banks will need to look at this agenda as part of the wider mix of other (current) legislation. A piecemeal approach, reacting to individual pieces of legislation, will ultimately fail. To maintain efficiency and better manage the wider legislative agenda, an over-arching perspective is vital and will prevent duplication of costly work.

To gain advantage from such a significant seismic shift in the regulatory environment will require banks to start acting sooner than they might imagine, the deadline of 2019 for ring-fencing will present challenges to many, and those banks that act fast to define the portfolio of change required and begin to drive strategic solutions will be those that profit most in the new world order.

This will be tough. Financial organisations are already struggling to cope with the influx of new regulation. Research undertaken by Moorhouse in 2012 shows that the increasing pace and volume of regulatory change means organisations are unable to focus on other strategic priorities that will help grow their businesses. The survey of 130 senior executives and board-level Directors in the UK FS industry, found that 83 per cent feel regulatory change is affecting their ability to deliver day-to-day operations and services and almost half (48 per cent) say the regulatory agenda is negatively affecting their competitive advantage. Well over three-quarters of those surveyed felt their organisation would have to change its business model in order to thrive over the next 3-5 years, with almost two-thirds reporting this change would need to be substantial or fundamental.

In what is already a very challenging environment, banking organisations will need to plan very carefully any additional work to separate or ring-fence different sides of their business.

To request a copy of the “Too much change?” report on the UK financial sector, visit






ECB stays put but warns about surge in infections



ECB stays put but warns about surge in infections 1

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.

Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.

But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.

“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.

Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.

Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.

She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.

The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.


Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.

Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.

But she signalled those risks were less acute, in part thanks to the recent Brexit deal.

“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”

Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.

“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.

Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.

There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.

The ECB has indicated it may not even need it to use it all.

“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.

Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.

Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.

(Editing by Catherine Evans)

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Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger



Bank of Japan lifts next year's growth forecast, saves ammunition as virus risks linger 2

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.

BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.

“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.

As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.

In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.

But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.

“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”

While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.

“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.


Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.

Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.

Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.

He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.

“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”

(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks



World Bank, IMF agree to hold April meetings online due to COVID-19 risks 3

WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.

The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.

This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.

(Reporting by Andrea Shalal; Editing by Chris Rees

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