Big British banks are lobbying regulators for more time to carve out their retail lending from riskier parts of their business, saying Britain's decision to leave the European Union has made the separation more complex and costly.
Lenders are required to complete the so-called ring-fencing of retail operations by the start of 2019. The initiative aims to avoid a repeat of the 2008 financial crisis, when banks' bad trading bets threatened to sink ordinary depositors and mortgage borrowers, leading to massive taxpayer-funded bailouts.
But the U.K. regulation — which also covers the European operations directly owned by British banks — was proposed in 2011, when there was no prospect of Britain quitting the bloc.
Since the Brexit result on June 24, several leading banks have told regulators that they first need to find out whether Britain will retain access to the EU single market, and how much access, before reorganizing their businesses in such a significant way, according to senior sources at the lenders.
The point of concern, they told the Bank of England's Prudential Regulation Authority (PRA), is how to treat retail operations in the Republic of Ireland and other EU countries.
Some banks do not know if they will be able to retain these businesses at all post-Brexit, or what level of service they will be able to offer customers, said the sources who declined to be named as the discussions with the regulator were private.
This hugely complicates the process of separating their businesses into two banks with individual risk appetites, customer bases and funding costs, according to the sources.
"A delay would be common sense... we are all building [the ring-fence] but we don't know what environment we're building it for," said a senior source at one of Britain's top five banks.
The PRA declined to comment.
If the uncertainties meant continental businesses would have to remain outside the ring-fence, this would expose European savers and home loan borrowers to the risks the plan was designed to shield British customers from, the sources said.
Much of the Brexit talks, when they come, are likely to boil down to a trade-off between Britain's controls on immigration and its access to the EU single market.
The uncertainty will affect the biggest banks - HSBC (HSBA.L), Barclays (BARC.L), Lloyds Banking Group (LLOY.L) and RBS (RBS.L) — to varying degrees, with those with the most exposure to continental Europe likely to be most burdened.
Banks with bigger cross-border lending activities now have to worry about which side of the ring-fence their non-U.K. retail banking businesses sit, but also whether they can maintain their non-U.K. businesses, sources said.
About 97 percent of operations at Lloyds, Britain's biggest retail bank, are supposed to sit within the ring-fence, while HSBC, which has much larger international and investment banking operations, will only have 30 to 40 percent.
Lloyds has a 5.9 billion pounds ($7.8 billion) retail lending business in Germany and the Netherlands, some 9.1 billion pounds of German retail deposits and a 4.5 billion pound Irish retail, corporate and commercial real estate lending business.
A source close to HSBC said its ring-fencing preparations were unaffected by Brexit. It intends to keep its main consumer businesses in Europe outside the ring-fence, as they are owned by separate subsidiaries. The bank has 380 branches and made retail banking profits of $388 million in France in 2015. It also offers retail banking through its 12 branches in Germany.
RBS's remaining retail business in Europe is mainly via the 146 Republic of Ireland branches of its Ulster Bank branch, whose retail banking business made a profit of 330 million pounds in 2015. The bank has also has interests in the Netherlands and Germany.
Barclays is in the advanced stages of exiting its European retail businesses altogether.
Ring-fencing is a British, rather than EU-driven, requirement and the start date is embedded in law, meaning it cannot be changed without parliamentary approval.
Barclays finance director Tushar Morzaria said on Friday that his bank would flip the switch over the long Easter weekend in 2018 - March 30-Apr. 2 - giving it four days to create the new ring-fenced retail entity and transfer customers across.
"Other banks will be doing something similar as it's the only four-day weekend in the year," he said.
Morzaria said Barclays' ring-fencing plans would be minimally affected by Brexit, but that other lenders with retail operations in Europe could see their plans complicated.
The banking sources said they hoped the PRA would provide greater clarity on how to treat these businesses and apply a pragmatic approach to enforcement after the official Jan 1 2019 start date, particularly if Britain's future relationship with the EU remains undecided.
Banks are close to having to seek credit ratings for the separate entities, one of the sources said, but without formal clarity on how to treat European businesses, the ratings which influence how much banks will pay for funding may be tough to assign.
"The UK referendum result could complicate some banks' plans because the extent to which they will be able to service EU customers from UK entities going forward is now less clear,” said Alan Adkins, group credit officer at Fitch Ratings.
The ring-fenced banks require new boards of directors, new staff contracts, and separated risk management and IT operations as well as individual balance sheets.
The task of recruiting appropriate board members and the make-up of the board for both the ring-fenced and non-ring fenced entities will be very different, depending on where the non-U.K. businesses end up, the sources said.
Some senior bank executives said they didn't expect the PRA to offer any kind of moratorium on the plan, and are proceeding with their separation plans without delay.
"I can't afford to sit back for three months and think 'well, I wonder'," a second senior bank executive said.
"The principles of separating your markets business from your commercial and retail banking are there... we haven't seen any flinching from the PRA on that whatsoever," he added.