by Jonathan Eida, researcher
At a Treasury Committee hearing this week, senior figures from the UK's largest banks -including Ian Stuart, CEO of HSBC UK - urged the government to revisit ring-fencing rules first introduced in the wake of the 2008 financial crisis.
Ring-fencing was designed to protect retail banking services, such as current accounts and small business lending, by legally separating them from riskier investment banking activities. The goal was simple: if a banking group failed, the essential parts of the business - the services used by everyday people and small firms - would be protected. It was meant to safeguard depositors, stabilise the financial system, and reduce the risk of taxpayer bailouts.
But has the cure become more costly than the disease?
Fast forward over a decade, and the banking world is a different beast. Bank leaders are now rightly pointing out that the colossal costs and heavy-handed constraints of ring-fencing are strangling progress, far outweighing any supposed unique benefits today. It's high time for a serious rethink.
One of the key criticisms is the high cost of compliance. A 2022 review led by Sir Keith Skeoch estimated that the ring-fencing regime costs UK banks £1.5 billion annually in legal, operational and compliance expenses. On top of that, research from Oliver Wyman shows that 15-20 per cent of banks’ investment budgets are now devoted solely to meeting regulatory requirements.
These are not just numbers on a screen, they are vast sums of capital that could otherwise be invested in innovation, digital infrastructure, or lending to households and businesses. And with rising economic pressures, these costs often trickle down to consumers in the form of higher fees or reduced service. The regulation is just another burden for us to pay.
The strain of these costs is visible in the closure of physical branches. Since 2015, more than 6,200 bank branches have shut - that's an average of 53 every single month! While digital banking has grown, branch closures disproportionately affect vulnerable customers, small businesses, and rural communities. Some of this pressure, banks argue, comes from the financial burden of operating within the ring-fenced regime.
You don’t just have to take the banks’ word for it either. The Skeoch Review itself concluded that ring-fencing offers “limited benefits” beyond the stronger capital rules and bank resolution mechanisms now in place. It recommended a more targeted and flexible model, particularly for banks that don’t have substantial investment banking arms - arguing that a one-size-fits-all framework no longer makes sense.
This isn't just a banking debate; it's about unleashing Britain's economic potential. With Chancellor Rachel Reeves reportedly “open-minded” about reform, now may be the moment to bring regulation in line with today’s economic realities.
To be clear, no one is calling for a return to the regulatory laxness of the pre-crisis era. But a growing number of voices are asking whether ring-fencing, in its current form, is fit for purpose. The UK needs banks that are not just stable, but also agile - capable of funding innovation, supporting businesses, and responding to global competition.
There are solutions to this issue which do not leave banks unable to properly invest. Resolution, for example, is the process by which authorities manage the failure of a bank in an orderly way, ensuring that essential services like payments and deposits continue without disrupting the wider financial system. Unlike the chaotic collapses seen during the 2008 crisis, modern resolution regimes are designed to protect taxpayers from footing the bill - losses are absorbed by shareholders and creditors through mechanisms like “bail-ins,” rather than government bailouts. In the UK, the Bank of England oversees this process, requiring major banks to hold sufficient capital and plan in advance for how they can be safely dismantled if needed. With strong resolution tools now in place, many experts argue that ring-fencing is no longer the only way to safeguard the financial system.
If we want banks to power investment in the real economy, ring-fencing reform deserves serious consideration.