Lex COMMENT
Ignore the whingeing. That was the trenchant advice of a lead architect of Britain's post-crisis financial regulation four years ago. Complaints over ringfencing of UK retail banks were predictable. Brexit, ultra-low interest rates and cut-throat competition were harder to foresee. Santander has decided to take a €1.5 billion ($2.6b) writedown on its UK operations. It is a sign of the malaise enveloping the sector.
Ringfencing was meant to make banking safer. Critics say it has increased cost, complexity and competition. It has sparked a price war in the mortgage market. Barred from using retail deposits to fund investment banking, banks have lent more to UK house owners. HSBC, which has tens of billions of pounds in surplus liquidity in the UK, has made a splash. Santander UK, which has a 11.2 per cent share of the mortgage market —more than HSBC — has hit back with the lowest five-year fixed-rate remortgage deal on the market.
The return on tangible equity was just 7.9 per cent in the first half, down from 9 per cent in 2018. The medium-term target return is 9-11 per cent, compared with 13-15 per cent for Santander as a whole. Even achieving that will be a struggle. The UK bank has already pruned its branch network but accounts for 40 per cent of a €1b Europe-wide cost reduction target. Santander's executive chairman Ana Botín describes the UK as "critically important".
But a focus on more profitable areas such as Latin America is justified. It is Santander's fortress in the Spanish and Portuguese-speaking world that is its unique selling point, even if its hub-and-spoke corporate structure irks some investors.
Ringfencing reduces the utility of the UK arm within this. Besides, it is an over-engineered solution, say critics. As capital requirements have risen globally, there is less need to isolate retail deposits. Living wills would allow banks to be smoothly wound down. The inefficiency associated with separate pools of capital hobbles British lenders.
Big banks face tough competition from upstarts with deposits below the £25b ($49b) threshold for ring-fencing. That includes fintech firms and Goldman's consumer bank Marcus, which can use the proceeds to fund its investment banking activities. In a declining sector, whingeing is predictable. That does not make it unjustified. When it comes to bank regulation, there are better ways to achieve the same result.
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