Investment Banking Regulations Squeeze Industry

In the United Kingdom, and much of the western investment banking world, financial institutions are facing greater scrutiny and regulation. This is especially true in regards to increased requirements for “ring fencing” and the segregation of investment banking from retail operations. According to the Financial Times, in the United Kingdom, the larger financial institutions are concerned that the proposed new regulations and restrictions would great an unfair competitive landscape, as the rules would include exemptions for smaller institutions. The rules would specifically require the ring fencing of retail operations from investment banking activities.

Both the Royal Bank of Scotland and Building Societies Association filed written submissions to the Parliamentary Commission on Banking Standards in protest of the proposed changes. While the Royal Bank of Scotland argued that all banks should be included in the scope of the new regulations, the Building Societies Association argued that the exemption level should be reduced to only £5 – 10 billion in total assets from the currently proposed £25 billion threshold.

Level Playing Field is required for Investment Banking Competition to Thrive

The Building Societies Association sees an opportunity in the new regulations to level what has been historically an unequal playing field. While building societies are regulated by separate legislation that restricts their activities in investment banking, they are currently competing for some financing arrangements with institutions that don’t face the same restrictions.

Adrian Coles, the Director-General of the association told the Financial Times, “our fear is that building societies, which are constrained by their own legislation, will be competing with a group of smaller banks of a similar size which are not constrained at all.”

While introducing additional competition will be a positive development for those seeking financing, it’s not clear whether the parliamentary commission studying the matter will be interested in adopting competitive market concerns into their proposed regulations.

New Requirements are Critical for the Stability of All Institutions

The Royal Bank of Scotland takes a different view of the new regulations, arguing that the rules should apply to all financial institutions that have both retail and investment banks. In essence, the rules are being implemented to ensure that retail deposits and activities are protected from riskier investment banking operations. Arguably, this protection is primarily for the benefit of the taxpaying public, as they are the group likely on the hook if a smaller institution failed due to excessive risk taking.

While the rules were principally designed to protect from large scale banking defaults, RBS makes a valid point that Northern Rock, a bank at the core of the financial crisis, would actually have been exempt from the proposed ring fencing rules.

Expansion of Regulation not Limited to the United Kingdom

Whether the parliamentary commission decides to proceed with their proposed legislation as is, or adopt the suggestions of the Society or the Royal Bank of Scotland, the new regulations do pose yet another regulatory hurdle upon financial institutions in the United Kingdom. And these types of restrictions are certainly not only being proposed in the British Isles; many countries have similar regulations already in place, or they are currently exploring the subject. This reflects the new, more highly regulated and monitored reality that investment banks will struggle to operate in.

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