Santander Sounds Alarm Over Bank Ring-Fencing

One of the UK's biggest banks has told regulators it may shift parts of its British business overseas if new structural reforms result in an unsustainable burden on its cost-base.

Sky News has learnt that Santander UK has outlined to the Prudential Regulation Authority (PRA) its concerns about the impact of ring-fencing requirements which come into effect in 2019.

The Spanish-owned bank said in its submission to the PRA that final rules due out later this year could prompt it to book parts of its commercial banking activities in alternative financial centres such as Frankfurt.

Santander UK was responding to a consultation which asked Britain's major lenders to set out their plans for adjusting to the new ring-fencing regime, which is designed to protect taxpayers during future financial crises.

Under proposals from Sir John Vickers' Independent Commission on Banking (ICB) in 2011, so-called universal banks will have to erect firewalls between their retail arms and their corporate and investment banking divisions.

Regulators have since outlined more detailed plans encompassing areas such as corporate governance, IT systems and funding.

City sources said that Santander UK had told the PRA that depending upon the watchdog's final decisions, it could opt to place business located outside its ring-fenced bank in the existing UK branch of its Spanish parent.

This would be accompanied by a transfer of some profitable activities to Frankfurt, they said, a move which could deprive the Treasury of some tax revenues.

Santander UK is said to be worried that if the ring-fence is defined too tightly, it would make it commercially unviable to establish a non-ring-fenced division in the UK.

The Spanish-owned lender has become the UK's fifth-biggest bank following takeovers of Abbey, Alliance & Leicester and Bradford & Bingley.

The disclosure of its concerns highlights the extent to which the new regime remains subject to challenge just four years before it is due to be implemented.

Santander UK's remarks are understood to be one of relatively few warnings from the big banks that the ICB's blueprint will result in a loss to the City of some corporate banking activity.

Other lenders, including Lloyds Banking Group, have also urged regulators to set specific parameters for the new structure.

Lloyds wants the PRA to waive the requirement for its ring-fenced bank to have a separate board of directors to its parent group.

The regulator, which is part of the Bank of England, has pledged to take a "proportionate" approach to the overhaul.

The Financial Times reported earlier this month that Barclays and HSBC were seeking to put as little business as possible into their ring-fenced banks in order to lower the cost of funding for their other operations.

Lloyds and Royal Bank of Scotland, the two major lenders still part-owned by UK taxpayers, are seeking the reverse solution.

The reforms are set to cost the industry billions of pounds each year.

Sky News revealed last year that HSBC had asked the Treasury to delay their introduction until after the completion of a competition inquiry into the personal current account and small business banking sectors.

A Santander UK spokesman declined to comment.