Ring-fencing was one of the major UK banking reforms introduced after the 2007/08 global financial crisis (GFC). The crisis exposed how losses and liquidity stress in investment banking and wholesale market activities could threaten day-to-day banking services such as payments, deposits, overdrafts and lending to households and SMEs. The objective was to make it less likely that the failure of a large banking group would interrupt core banking services or require a taxpayer bail-out.
When it came fully into force on 1 January 2019, the largest UK banking groups were required to separate core retail banking from investment banking activity, placing the retail bank inside a ring-fenced body, while the riskier or more market-facing activity was undertaken outside. The aim was to protect retail banking, and therefore the general population, from shocks arising elsewhere in the group or in financial markets.
This separation was intended to make ring-fenced banks simpler, easier to supervise and easier to resolve in a stress scenario. It also acts as a “circuit breaker” between retail depositors and more volatile financial market activity.
So, if all this seems sensible, why is the government looking to change it?
It is worth emphasising that the UK government is not proposing to abolish bank ring-fencing, but it is looking to make the regime more flexible, less prescriptive and more supportive of economic growth. The challenge to policymakers is how to preserve the stability benefits of post-GFC reform while avoiding unnecessary constraints on banks’ ability to lend, be competitive and provide support to UK businesses.
The government’s argument is that the banking and regulatory landscape has changed since ring-fencing was designed. Since the GFC, banks are better capitalised, resolution planning has developed, MREL requirements have been introduced, operational continuity rules have been strengthened, and the PRA’s supervisory toolkit has evolved. The government therefore believes some parts of the ring-fencing regime are now overly rigid, duplicative or embedded too deeply in legislation to respond quickly to market and regulatory developments.
The immediate policy context is the government’s wider financial services growth agenda. During her Mansion House 2025 speech, the Chancellor confirmed the government would retain ring-fencing but review the regime to identify reforms that could support growth. HM Treasury’s May 2026 review concluded that ring-fencing still has a stability role, but that there are opportunities to make it more flexible, proportionate and responsive to market developments and the wider regulatory framework.
The proposed reforms cover five main areas.
First, the government wants a more agile framework. It intends to use the upcoming Financial Services and Markets Bill to remove some overly prescriptive requirements from primary legislation and allow more detail to sit in PRA rules. This would give the PRA more scope to remove duplication, use waivers or modifications, and reflect developments in the bank resolution regime.
Second, it wants ring-fenced banks to provide a broader range of products and services to UK businesses. The centrepiece is a proposed “New Growth Allowance”, potentially worth up to 10% of a ring-fenced bank’s Pillar 1 risk-weighted assets for credit risk, which it suggests could be used to unlock up to £80bn of financing for UK businesses.
Third, the government is looking at risk management products. Recent reforms allowed some additional products, such as FX collars and inflation swaps, but the government is considering whether ring-fenced banks should be able to offer a wider range of hedging tools to corporate clients.
Fourth, the Prudential Regulation Authority (PRA) will consult on allowing more flexibility for operational services to be shared across the ring-fence, such as IT, data processing and back-office functions. The PRA’s position is that this may now be possible without undermining resilience because of developments in resolution and operational continuity regulation.
Finally, the government will keep the £35bn core deposit threshold under review every three years and the PRA will review ring-fencing-specific reporting requirements in 2028.
Looking at the case for reform, one argument is proportionality. Ring-fencing was deliberately robust when introduced, but a regime designed in response to a crisis can become prohibitive as the wider framework evolves. If other prudential or resolution requirements now achieve the same objective, retaining duplicate ring-fencing rules may add cost without adding much resilience.
There is also a growth argument. If a fast-growing business needs more sophisticated financing or hedging products, it may currently need to move from the ring-fenced bank to the non-ring-fenced bank or to a non-bank provider. That can create friction, cost and relationship disruption. HM Treasury has noted that retail deposit funding has historically been cheaper than wholesale funding, which may allow ring-fenced banks to offer cheaper lending and financial services.
On the operational aspects, requiring large banking groups to duplicate systems, processes and support functions across the ring-fence may be inefficient, particularly where operational continuity in resolution rules already provide safeguards. Reducing duplication could lower costs, improve service delivery and allow management to focus on resilience outcomes rather than structural form.
A case against reform is gradual dilution. Ring-fencing works partly because it is easy to understand - retail banking sits inside the fence while riskier investment banking sits outside. The more exceptions, allowances, waivers and shared services are introduced, the less clear the boundary becomes.
There is also a depositor protection concern. Allowing ring-fenced banks to conduct activities previously prohibited, even within limits, could expose them to more market, operational or counterparty risk.
Operational sharing also needs careful handling. Shared IT and back-office services may reduce costs, but they may also increase dependency across the ring-fence. In a stress scenario, the question will not simply be whether the ring-fenced bank is legally separate, but whether it can continue to operate without interruption.
However, the government has stated that it is not proceeding with proposals to allow more permissive sharing of financial resources across the ring-fence. HM Treasury concluded that this would increase mutual financial dependence and undermine the purpose of ring-fencing.
The implication for clients is that it is unlikely to change day-to-day counterparty risk management immediately. The reforms remain subject to legislation, consultation and PRA rulemaking. However, they are relevant to bank credit analysis. Investors should monitor whether the reforms affect entity-level credit strength, ring-fenced bank autonomy, intra-group operational dependencies, MREL positioning, resolution strategy and rating agency treatment.
The key conclusion is that ring-fencing is being reshaped, not removed. The government wants to preserve the post-crisis framework while making it less restrictive for banks and businesses. Whether that balance is achieved will depend on the details, including the size and scope of the New Growth Allowance, the safeguards around operational sharing, and the PRA’s willingness to maintain a clear boundary between flexibility and mission creep.
If you want to find out more about our bank credit analysis or any aspect of our creditworthiness service, please contact us at info@arlingclose.com
18/06/2026
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