Four of Britain's biggest banks have sent a letter to chancellor Rachel Reeves urging her to scrap the ring-fencing regulation introduced after the 2008 financial crisis, arguing it hampers economic growth and is now "redundant".

Chief executives from HSBC, Lloyds Banking Group, NatWest Group and Santander UK signed the letter, which was first reported on by Sky News, describing the regulation as "not only a drag on banks' ability to support business and the economy, but is now redundant".

The ring-fencing rules, which came into effect in 2019, require banks with deposits of more than £25 billion to separate their retail banking operations from riskier investment banking activities. The regulation was designed to protect ordinary customers and taxpayers from potential bank failures.

In their letter, the banking leaders argued that abandoning ring-fencing would be "among the most significant steps the government could take to ensure the prudential framework maximises the banking sector's ability to support UK businesses and promote economic growth".

The executives highlighted several negative impacts of the current regime, including "significant and often overlooked costs on businesses" and distorted lending decisions due to "considerable liquidity trapped inside the ring-fence" that can only be used for limited purposes.

"There has been a material decline in UK wholesale banking since ring-fencing was introduced, to the detriment of British businesses and the perception of the UK as an internationally orientated economy with a global financial centre," the letter stated.

The bank chiefs called on Reeves to announce the abolition of ring-fencing during this Parliament at the upcoming Mansion House dinner, arguing it would "demonstrate the government's determination to do what it takes to promote growth".

A Treasury spokesperson indicated the government was receptive to the banks' concerns, saying: "The Chancellor has set out a new approach to regulation that supports growth, instead of excessively focusing on risk, and why we are co-designing the first-ever Financial Services Growth and Competitiveness Strategy with industry."

However, Bank of England governor Andrew Bailey had previously warned in February that "the costs of that global financial crisis should not be forgotten" when considering changes to financial regulation, emphasising there is "no trade-off between economic growth and financial stability".

The UK is the only major economy to have adopted such extensive ring-fencing regulations for its banking industry.

Ring-fencing was established following the recommendations of the Independent Commission on Banking in 2011, which was led by Sir John Vickers. The regulation came into force in 2019 after banks spent billions of pounds on implementation.

The primary aim was to separate everyday banking services from investment banking activities, making the system easier to manage if one part of a banking group faced insolvency, and protecting retail depositors and essential banking services from potential failures.

Alongside ring-fencing, banks were also required to increase capital buffers and create "living wills" to manage potential future crises. The Treasury has already moved to raise the deposit threshold from £25 billion to £35 billion in response to pressure from growing banks.

While banking executives argue that removing the rules would free up capital for lending, the Bank of England has maintained that financial stability itself is a prerequisite for sustainable economic growth, with governor Andrew Bailey explicitly stating there is no trade-off between the two objectives.

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