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