In this article, we’re exploring the UK ring-fencing meaning, its application, nuances, and how it can impact your options when seeking offshore accounts.
This is especially important for anyone interested in offshore banking UK style, which is a bit different than offshore banking elsewhere – you can see what we mean here in our free guide.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Ring Fencing Meaning
- How Ring-Fencing Has Impacted UK Banks
- Ring Fence Benefits
- Frequently Asked Questions
- Ready to Explore Your Options?
Ring-Fencing Meaning
Ring-fencing refers to the separation of certain financial assets and institutions from others. In the United Kingdom, ring-fencing specifically refers to the separation of retail and SME banking activities from investment and international banking activities. The stated mandate of ring-fencing is to increase the stability of the UK financial sector.
That said, ring-fencing doesn’t apply to every bank, only those that cross a certain threshold. Currently, the threshold to require ring-fencing is 25 billion GBP in retail and SME deposits, which is a large sum. So, not surprisingly, only 14 banks are actually required to ring-fence retail deposits. This represents approximately 1.2 trillion GBP in retail and SME deposits.
In other words, the biggest banks in the United Kingdom have had to restructure their operations to accommodate this change, and they have. But, what does that actually mean for depositors? We’ll dive into this below when we take a look at the benefits of ring-fencing.
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How Ring-Fencing Has Impacted UK Banks
Not all banks felt the impact of ring-fencing equally. After all, only 14 of the 357 monetary financial institutions (MFIs) had to comply. That represents only 3.9% of all UK banks and building societies. Of course, since these are the 14 largest banks in the country, they do represent a disproportionate amount of the total deposits held.
The banks that were within the scope of ring-fencing (at least 25 billion in retail & SME deposits) had to undergo structural reforms. Said differently, they had to ring-fence their operations.
This approach to stabilizing the UK banking sector effectively separated different divisions of the same banks (or banking groups) into separate legal entities. So, instead of having a single financial institution that would be responsible for losses across retail, investment banking, and international banking, retail (and SME) clients are now protected from any liability.
Ring-Fence Benefits
The primary benefit of ring-fencing UK banks is that retail and SME clients have less exposure to the volatility and higher-risk activities associated with investment and international banking.
That said, it also causes a wider range of bureaucratic processes for individuals looking to open accounts, and has made certain banks significantly more difficult to open accounts with. The reason for this is that it has segregated international and standard retail clients into their respective banking groups. This can be a challenge for individuals with legitimate reasons to open accounts in one or the other.
Frequently Asked Questions
Below is the most common question we receive from people looking into the meaning of ring-fencing. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
What Does Ring-Fencing Mean in Banking?
In banking, ring-fencing means that certain financial institutions and assets are segregated from the rest. In the context of the UK banking system, it refers to separating retail banking from investment and international banking. This is to ensure that retail banking clients are not exposed to the higher levels of volatility and risk commonly associated with investment banking and international banking activities.
Ready to Explore Your Options?
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