HSBC said assets in the banking book, which are held to maturity, should be held within the ring-fence, which would mean mortgages, corporate loans and all long-term assets on the balance sheet protected by a government guarantee.
Trading book assets, which are marked to market prices, would be kept outside the ring-fence, leaving banks to independently fund them via wholesale markets.
“Overall, the probable outcome under this regime would be separation closer to a Glass-Steagall type of basis,” HSBC said in a written submission to lawmakers on Wednesday, referring to the US legislation of 1933 that split investment banking and commercial banking.
“This would have certain inefficiencies but would be much preferable to a structure that risked separating funding from lending.” The bosses of Britain’s top four banks on Wednesday gave contrasting views on what should go into a “retail ring-fence” proposal that is at the heart of a plan to shield savers and taxpayers from a repeat of the global financial crisis.
Barclays and Royal Bank of Scotland favor a narrow definition of what is included, whereas HSBC and Lloyds support a bigger pool.
RBS CEO Stephen Hester warned that creating too big “a protected beast” raised the risk of moral hazard.
Barclays said a retail ring-fence “could be a costly way of achieving what could otherwise be achieved (by other methods),” but said some form of ring-fence was inevitable and “there are ways to make it work.”
What assets go into the ring-fence is the key issue banks are grappling with after an independent panel tasked with making the industry safer said it should be introduced.
The ring-fence could cover over 2.5 trillion pounds of assets, given the massive size of UK bank balance sheets, or maybe just a third of that, depending on what is included.
The commission will finalize its plans in September.
HSBC’s main concern is to avoid a funding mis-match, whereby the ring-fence would be “overfunded” and not able to use extra deposits for a portfolio outside the ring-fence, which would have to be funded in wholesale markets. This risks a major dislocation in funding for corporate loans, it and Lloyds said.
Unlike most rivals, HSBC has more deposits than loans.
Its proposal would see the ring-fence contain both retail and corporate deposits and the corresponding loans, and is based on the IFRS 9 measurement of “amortized cost.”
The International Accounting Standards Board is still finalizing its new IFRS 9 standard for measuring the value of assets like derivatives and bonds held by banks on their books.
It sets out two ways for measuring value — amortized cost and fair value. Assets that generate income, such as bonds, should be valued at amortized cost. Other assets, such as derivatives that are frequently traded, must be priced at the market price.
