British retail banks to receive relaxed capital rules in bid for increased competition.

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The UK finance ministry has proposed legislation to relax rules that require banks to ring-fence their retail arms with a capital reserve. The draft legislation suggests increasing the threshold at which ring-fencing applies to banks from £25bn to £35bn. The rule was introduced in 2019 to ensure that deposits are secure even if riskier investment banking activities lose value. The proposed changes aim to make the rule more flexible and reduce unintended consequences while boosting competition in the banking sector.

The changes would exempt banks from ring-fencing if their trading assets are less than 10% of their core capital buffer, unless they are part of a globally systemic bank. Additionally, ring-fenced banks would be permitted to establish entities outside of the UK to compete with international and domestic banking groups. UK Finance, a banking industry body, supports the proposals as they would enhance customer choice and competition.

The government plans to present secondary legislation for the reforms in early 2024, with the changes taking effect once they clear parliament. Separately, the Bank of England has published a consultation paper outlining proposals for a rule that would require ring-fenced banks to ensure that any branch or subsidiary outside of the UK does not pose a significant risk to core services in the country. The aim of these proposed changes is to improve outcomes for banks and their customers, increase competition, and enhance the competitiveness of the UK banking sector.

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