En Voyage_Issue#11_Flickbook

Business
UK RING FENCING
– HOW SAFE IS YOUR CASH?
BY CRAIG ALLEN, HEAD OF INVESTMENT MANAGEMENT, JULIUS BAER GUERNSEY
TEN YEARS LATER
Ten years have now passed since
the start of the Financial Crisis in
September 2008. Most readers will
remember where they were on the
Monday morning of 15 September
2008, reading the news of the failure
of Lehmans and the subsequent
rescue packages of certain wellknown
UK, US and European
banks. The banking industry is now
undeniably in a far stronger position,
with new regulations resulting in
increased capital requirements,
depositor protection schemes
and stringent stress testing. These
regulations have all been positive
developments for the consumer,
though the most recent changes in
the UK are particularly worthy of note.
UK RING FENCING
The UK regulator has now imposed
a ‘ring fencing’ on all major banks
with offices in the UK. Ring fencing
generally involves splitting the
banks into two, protecting UK retail
consumers and moving them into
a ‘ring-fenced’ position away from
the higher risk activities of the bank.
These higher risk areas can include
institutional business, investment
banking and commercial lending.
This means that in the event of a
default, the need for a bail out from
the UK government is reduced and
UK taxpayers are far less likely to have
to pay for any bank failures in the
future. The new rules come into force
on 1 January 2019, though some
banks have already implemented the
changes. A UK-based retail client still
benefits from the Financial Services
Compensation Scheme which
protects depositors up to the value
of £85,000. For amounts in excess of
this, the clients rely on the strength
of their bank in the event of a major
financial downturn. The credit ratings
provided by independent agencies
provide a good indication of a bank’s
financial strength. Interestingly, ring
fencing has therefore resulted in
certain banks now having two credit
ratings: one for the UK ring-fenced
bank and one for the international
operations. This is particularly relevant
REGARDLESS OF THE
CHANGES DUE TO UK
RING FENCING, MOST
BANKS APPEAR TO BE IN A
FAR STRONGER POSITION
TODAY THAN THEY WERE
10 YEARS AGO.
to readers based in the Channel
Islands as Guernsey and Jerseybased
depositors have typically been
grouped with the riskier activities of
investment banking and commercial
lending, away from the UK depositors.
SPLIT RATINGS
Looking at one high street bank
as an example, the UK-based entity
where all UK-based retail clients
have their accounts has a Moody’s
Long Term Deposit rating of A1. To
put this into perspective, this is two
notches below the credit rating of
the UK Government. Interestingly,
their Guernsey and Jersey-based
clients are now exposed to the
international bank which is rated at
A2, another notch lower. Time will tell
whether these new ratings move up
or down, but the important message
for Guernsey and Jersey-based
investors with larger cash deposits
is to check the credit rating of their
banks and to check any current or
future impact of UK ring fencing.
SUMMARY
Regardless of the changes due to
UK Ring Fencing, most banks appear
to be in a far stronger position today
than they were 10 years ago. Clients
with cash deposits in Guernsey are
covered by the Guernsey Banking
Deposit Compensation scheme
for amounts up to £50,000. For
larger sums, they have the option of
investing into the bond markets as this
moves any risk away from their bank’s
balance sheet. However, given the
experiences of Lehman, Landsbanki,
HBOS, Northern Rock and other
financial institutions in 2008, it is
definitely worth checking a bank’s
credit rating and financial strength
before opening an account. At Julius
Baer, we focus solely on private
banking and investment management
with no exposure to the higher risk
areas of the banking industry. This is
one reason why Julius Baer did not
require any government or taxpayer
assistance in 2008. Further, as a
branch, clients banking in Guernsey
are exposed to the credit rating and
financial strength of the Swiss Parent
company, which is currently rated
Aa2, one of the highest ratings in the
industry and three or four notches
higher than many UK banks.
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