Although the changes would come into force gradually over the next few years, they would almost certainly reshape the offshore banking industry’s existing business model, banking industry sources say.
The proposals at issue were contained in the so-called Vickers Report, published last September by the Independent Banking Commission (IBC), headed by Sir John Vickers. The Government publishedits response to the report’s findings on 19 December, and set a deadline of 12 March for comments to its proposals, based on the Vickers Report, to be submitted.
In a statement accompanying the Government’s response, the Treasury said the plan was to “implement the ICB’s advice in stages, with the full package of reforms completed by 2019”.
Crown Dependencies not included
The reason for the offshore banking industry’s concern over Vickers is that, as currently drafted, the ring-fencing would only cover those parts of the banks that are within the European Economic Area – meaning that the Channel Islands and Isle of Man outposts of UK banks would not be included.
Not that things would be much simpler were the ring-fencing extended to the offshore arms of the UK banks, as this also could raise all manner of issues, as new banking entities were forced to seek licenses, and such current practices as “upstreaming” of retail deposits to London operations might have to be changed.
Banking industry officials on Jersey, Guernsey and the Isle of Man report the matter is being discussed at the highest levels by their own industry representatives and organisations as well as by government officials, regulators, representatives from the other islands and the UK’s British Banking Association, as the 12 March deadline for comment approaches.
Structure matters
The collapse in 2009 of two Icelandic banks, which caused the failures of their operations in the Isle of Man and Guernsey that left depositors out-of-pocket, is a reminder of the hazards offshore banks may face if they fail to anticipate problems in the way they are structured relative to their parents.
“It’s a big issue for Jersey, exactly as it is for the UK,” said Martyn Scriven, secretary of the Jersey Bankers Association, who noted that “a great deal of time and effort” is currently being spent by industry officials on working out just how the Vickers Report changes would be likely to affect the offshore banks.
The proposals, he said, presented the offshore banking industry with “an awful lot of questions around some of the existing models and structures that we have, which are likely to be quite significant for how we operate”.
“But there could be opportunities out of this, as well as threats,” he added. “It’s still early days in all of this.”
Nicholas Winsor, chief executive of HSBC for the Channel Islands and Isle of Man, agrees. "The new ring-fenced banks will only be able to deal with clients inside the European Economic Area. Banks in the Channel Islands and the Isle of Man deal with clients from all over the world, and could see this business grow as the mainland banks are forced to scale back."
Jersey neighbour Guernsey is also "closely" watching the progress of the recommendations contained in the IBC report, "and have been since it came out", Guernsey Finance chief executive Peter Niven said.
He noted that Guernsey was in talks on the issues involved with Jersey and the Isle of Man, “since most of our banks are multi-Island”.
“Having said that, if you look at the split between the so-called casino banking and retail banking, we have the latter” in Guernsey, Niven added.
“Predominantly, they are banks that are either fuelling the local economy, in terms of lending, and dealing with corporates and retail private customers; or they are the types like Schroders and Rothschilds, which are dealing with private, wealthy clients, so they’re wealth management private banks.”
Importance of upstreaming
For Geoff Cook, chief executive of Jersey Finance, a central issue in considering the way Crown Dependency banks are ring-fenced from their mainland UK parent entities is how the islands’ money is to be upstreamed, which he noted is not dealt with in Vickers’s recommendations.
Currently, £1 in every £20 of what he calls ‘sticky’ or ‘safe’ money in the UK banking system – that is, money from private individual savings and capital accumulated from businesses and pension funds, which tends to be stable, low-risk and therefore highly desired by institutions – originates from Jersey, according to Cook, who prior to joining Jersey Finance in 2007 was head of wealth management for HSBC in the UK, during a 25-year career in banking.
The up-streaming question matters, he added, because few high street banks in the UK are able to raise enough deposits from their own customer bases to fund all of their lending operations.
“Therefore, this is something we’ve taken a keen interest in.
“Our expectation at the moment is that the deposits that we upstream will still be able to access ring-fenced banks [in the UK]. But the precise mechanism isn’t quite clear, and won’t be until they bring the detailed rules out.”
What is more, there is a worry that, post-ring-fencing, Jersey bank deposit money could be labelled ‘wholesale’ rather than ‘sticky’, and thus, unwittingly, keeping “a large and valuable source of low-risk funding” from feeding through the UK banking system into the UK economy, “simply because new regulations will be based on incorrect categorisations and inaccurate labels.”
Compensation scheme implications
Mark Waterhouse, president of the Isle of Man Bankers Association, stressed that the Vickers Report would have “major implications for all banks”, not just those operating in the Crown Dependencies, but expressed optimism that the IoM’s banking industry would prevail.
But one key area Waterhouse says could be affected by ring-fencing of banks in mainland Britain is that of the Crown Dependency banks’ depositor compensation schemes. Currently banks operating in the three jurisdictions contribute to their own locally-run schemes, as the UK’s Financial Services Compensation Scheme does not cover their depositors.
A result of this arrangement is that the maximum amount of compensation protection currently available to individual depositors in the Crown Dependencies is £50,000 per qualifying deposit, even though the maximum amount available to depositors in UK banks and building societies went up to £85,000, from £50,000, on 1 Jan 2011, in line with a rise to €100,000 across the EU. (A plan to enable savers who temporarily deposit large amounts in their bank accounts to be covered for more than £85,000/€100,000 is currently being considered in Europe.)
“The essence of the proposals is that there will be different levels of security for customer deposits, with those within the ring fencing receiving the greatest level of protection,” Waterhouse said.
“It may be that only those funds which are ring-fenced are also covered by a depositor compensation scheme. There is expected to be a cost for this greater level of security, which could result in lower levels of returns (interest) for the customer. Customers may decide that they would prefer to take a risk on depositing with non- ring-fenced banks, even if there is no compensation scheme cover, if this provides them with a greater return.
“They will therefore be relying upon the strength and security of that bank, and not some external scheme, protecting part of their deposit. If this becomes the case, then the key issue for all banks will be to ensure customers are fully aware of the potential consequences of their choice.”
