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Introduction to International Finance

   

Added on  2020-05-04

9 Pages2809 Words47 Views
International Finance1

IntroductionThe banking regulation in the United Kingdom has undergone many significantchanges in the current years after the occurrence of the financial crisis. The financial crisisplaced emphasis on developing a banking sector in the UK that is able to maintain health andstability. The reforms are mainly introduced in the banking sector of the UK to change itsregulatory structure for simplifying the regulation of banks in the UK. In this context, thePrudential Regulation Authority (PRA), a part of Bank of England, has developed a newregulation ‘Ring-fencing’ for separating retail operations from investment banking operations(Vickers, 2011). The present report in this regard emphasizes on the need of developing‘ring-fencing’ and its limitations. In addition to this, the report analyses the implementationof ring-fencing in one of the UK bank, such as HSBC, for examining its implications on thecustomers. Also, the report addresses the challenges faced by the bank in implementing suchregulatory changes. UK Banking Regulation ‘Ring-Fencing’The Prudential Regulation Authority (PRA) has been developed as a part of Bank ofEngland by the Financial Services Act in the year 2012 for developing policies related toprudential regulation and supervision of UK banks. The PRA has developed new policies inrelation to the implementation of new regulation in the UK banking sector of ring-fencing.The legislation of ring-fencing is introduced for the purpose of separating the operations ofretail banking from investment banking in the major UK banks. This is done for protectingthe customer interests by safeguarding the bank daily operations from the risks arising due tofailure in their other businesses. The separation of core retail banking operations from othertypes of banking activities is one of the most important reforms introduced by the UKgovernment for strengthening the UK financial system. The retail banking operationsinvolves managing the savings and current accounts, deposits and personal loans activities ofits clients. On the other hand, investment banking operations includes raising funds by sale ofsecurities to the companies and the government (Prudential Regulation Authority, 2016). The bank of England is currently placing large emphasis on implementing the ring-fencing rules in the banking sector of the country for improving its ability to withstand thefinancial shocks. The adoption of such a structure in the banks that will separate retail andcommercial activities will reduce the risk for the customers. As such, the regulation of ring-fencing will help in reducing the risks in the main services provided by the banks such as2

deposits, current accounts, saving accounts and payments. The ring-fencing regulation aimsto promote the financial stability in the UK banking sector by improving the resilience of themajor banks of the country. It is thus regarded as a major step towards improving thefinancial system of the UK after the occurrence of the financial crisis. The large banks of theUK by placing the investment and international banking activities at the same level oftenfaces several types of problems. This is the main function of the banks of lending, deposit andpayments are put to risk if there occurs some problems in its investment activities such as thatoccurred during financial crisis (International Monetary Fund, 2016). The ring-fencing regulation will be implemented to the banks that have averagedeposits of more than £25 billion for more than three years. There are mainly six banks thatare subject to implementation of such regulations that are HSBC, Barclays, Lloyds BankingGroup, RBS, Santander UK and the Co-operative Bank. The ring-fencing is to be introducedfrom the year 2019 in the UK banking sector to secure the confidence of the consumers in thebanking sector post-crisis. As such, the PRA is currently emphasizing on developingsupervision policies for monitoring the banking activities after the development of their ring-fenced structures. The PRA holds the responsibility of examining the extent of compliance ofthe banks with the ring-fencing provisions and posses the electrification power in case ofnon-compliance of bank with the new regulations. The electrification power of the PRAenables them to implement structural changes in the banks so that they comply with the ring-fencing regulations. The ring-fenced structures will enable the banks to manage the failure inits investment activities in a proper way without impacting its daily business operations. Thisin turn will help in reducing the occurrence of the financial crisis in the future and thusstrengthening the UK economy (Financial Conduct Authority, 2016). The central bank is also facing several challenges for the adoption of the ring-fencingregulations in the UK banking sector. The banks have to incur a huge expenditure forimplementing the ring-fencing reforms. As such, the increase in the cost for introducing suchregulations will have an impact on the money available for lending purposes by the banks.The adoption of ring-fencing structure will also increase the complexity level for thecustomers as they have to create new accounts for supporting these structural changes. Thering-fencing regulations proposed by the PRA will only be applicable to the large banks ofthe UK thus creating an asymmetry in the banking sector (Vickers, 2011). The banks that aresubject to the implementation of the new regulations will have to restructure their operationalactivities completely by transforming the structure of their balance sheet and governance3

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