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RBS: Ring-fencing will increase risks

Thursday 9 June 2011 – by Andrew Hickley

Ring-fencing the activities of UK banks will increase systemic risk and moral hazard, according to the chief executive officer of RBS.

Stephen Hester has warned that retail banking activities would become a “protected beast” under the measures, which were a critical part of the government-appointed Independent Commission on Banking’s draft report, released in April.

“I believe that creating a ring-fence increases some of the systemic risk and decreases the ability of banks to withstand the risk and has significant costs to it,” Hester said, speaking in front of the Parliamentary Treasury Select Committee on Wednesday.

“My concern is that from a systemic standpoint there that you have to work on moral hazard.

“We need to be careful that you’re not creating a ring-fence that will contain exactly the thing that systemically lost a lot of money [in the crisis] and saying it is a protected subsidiary that we will support.”

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Ring-fencing the activities of investment vehicles used by banks would make these more volatile because they would not have this same support, Hester added.

Barclays chief executive, Bob Diamond, also spoke in front of the panel, arguing the move would make a state guarantee “explicit”.

The ICB has recommended that banks’ retail and so-called casino operations are separated, saying it would make it easier to resolve banks that get into trouble.

Diamond also voiced his support for the use of living wills, which he said Barclays had already invested £30m (€33.7m/$49.3m) in preparing.

This resolution and recovery plan would be able to be tested between September and March, he said.

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