Most institutional investors don’t believe that proposed reforms to banking regulation in Britain will be adopted globally, according to a recent survey.
Earlier this year, the UK Independent Commission on Banking proposed a series of fundamental reforms to banking regulation, including the ring-fencing of core deposit-taking activities from riskier bank functions, such as investment banking.
A survey of European fixed income investors, representing the views of managers of an estimated US$5.8 trillion of fixed income assets, shows that investors don’t expect that those reforms will be implemented in other countries, reports Fitch Ratings.
“Only 13% of respondents believe the whole world will follow the UK ICB report recommendations to separate retail from wholesale banking,” said Monica Insoll, managing director in Fitch’s credit market research group. “However, 42% of investors said other countries may accept this proposition at a later stage, but only after another severe crisis.”
Among the 45% who said the split would not take place, the majority said the merits of the universal banking model outweigh its disadvantages, and 15% cited the powerful banking lobby in other key jurisdictions as a key hurdle, Fitch notes.
“The ICB’s recommendations go beyond other resolution regimes being developed. At a time when euro zone banks in particular are grappling with more immediate risks, some of the ICB’s more radical recommendations, for example around ring-fencing, are unlikely to see widespread replication anytime soon,” said James Longsdon, co-head of Fitch’s EMEA Financial Institutions group.
Fitch adds that it believes the ICB’s recommendations on stability and competition within the UK banking sector are balanced and pragmatic and should make core retail banks safer and easier to resolve.
The survey also shows that investors have become highly concerned about banks’ ability to fund themselves. Nearly half of respondents (49%) said the banking sector faces the greatest refinancing challenge; overtaking developed market sovereigns for the first time. Survey participants also identified access to funding as by far the most critical risk to banks’ credit quality, ahead of the macro economy and regulation.
The survey was conducted between September 27 and October 31.