What is the purpose of ring-fencing?
Ring-fencing of essential retail banking services is one of the reforms brought in by the UK government, aiming to strengthen the UK financial system following the financial crisis that began in 2008.
Ring-fencing legislation requires each of the larger UK high street banks, including Barclays, to separate certain retail and smaller corporate banking activity and products, like savings accounts, current accounts and payments, from more complex, wholesale and investment banking activity and from certain activities outside of the European Economic Area. This is to protect it from unrelated risks elsewhere in the banking group and shocks affecting the wider financial system.
Ring-fencing reduces the possibility that essential banking services used by ordinary depositors are put at risk by a failure in another part of the business or the global financial system.
How will Barclays achieve ring-fencing?
Barclays will achieve this by setting up a ring-fenced bank in the first half of 2018 which will be separate from Barclays Bank PLC. The two entities will operate alongside, but independently from, one another as part of the Barclays Group under the listed entity, Barclays PLC.
The ring-fenced bank will offer everyday business and personal banking services to individuals and smaller business customers in the UK. Products and services designed for larger corporate clients and high net worth individuals with more complex needs, as well as wholesale and international banking clients, will be provided by Barclays Bank PLC.
What activities can Barclays Bank PLC undertake that the ring-fenced bank cannot undertake?
Barclays Bank PLC will offer clients access to a wider range of investment, risk and finance products, and to the broader geographical reach which they may require. It is able to do this because it will be permitted to carry out certain activities and services which our ring-fenced bank will not be permitted to undertake. These activities are known as “Excluded Activities” and “Prohibited Actions” and are described below, along with the benefits and risks arising from such activities.
What are Excluded Activities and Prohibited Actions?
Excluded Activities are defined by legislation as including the activities of “dealing in investments as principal” and “dealing in commodities as principal”. Dealing as principal means that Barclays Bank PLC will face risks of the sort detailed below, which arise from buying or selling securities and other financial products for clients and itself or other members of the Barclays Group, in its own name.
Prohibited Actions include incurring exposures to certain other financial institutions when executing transactions or payments; and establishing branches and/or subsidiaries in non-EEA jurisdictions.
The above is not exhaustive and does not represent all Excluded Activities or Prohibited Actions which will be undertaken by Barclays Bank PLC. However, it provides an overview of the types of activities/actions Barclays Bank PLC will undertake which the ring-fenced bank will not be permitted to undertake (except in very limited circumstances).
What are the benefits of Barclays Bank PLC undertaking Excluded Activities and Prohibited Actions?
As a result of being permitted to undertake these additional activities, Barclays Bank PLC will have a broadly-diversified business model, both in terms of the nature of business it undertakes and its geographic spread.
In turn, this is beneficial to its clients that have banking and investment needs that span a wider range of products, services and geographies as their needs can be met through one strong and established financial services provider.
What are the relevant risks arising from undertaking Excluded Activities and Prohibited Actions?
As a consequence of carrying out Excluded Activities and Prohibited Actions, Barclays Bank PLC will be exposed to the types of risks which generally arise from carrying out such activities. Below are examples of the key types of risk associated with such activities. Please note this is not an exhaustive list of all the risks that arise from carrying out such activity.
- By buying, selling, underwriting or making a market in securities, commodities, derivatives and other investments, Barclays Bank PLC is exposed to fluctuations in the value of such products
- By participating in foreign exchange markets inside or outside the EEA, Barclays Bank PLC is exposed to movements in foreign exchange rates
- Through its wider activities in the global financial markets, Barclays Bank PLC is exposed to risks of market disruption internationally, which may cause illiquidity or difficulty in selling products at their value prior to any disruption
- By incurring exposures to other financial institutions, Barclays Bank PLC may be adversely affected in the event of an insolvency or default affecting one or more of those financial institutions or the wider financial system
- By operating through branches or businesses which are outside the EEA, Barclays Bank PLC is exposed to risks arising in those regions and markets.