In 2011 challenger bank gross mortgage lending accounted for 17.5% of the market, according to research by Investec cited in the British Bankers’ Association report. By 2013 this share had risen to 29%.
Jeffries bank analyst, Joseph Dickerson, said the leap in market share would only be possible if the challenger banks could sustain this level of growth.
The BBA lists the challenger banks as Aldermore, Handelsbanken, Metro Bank, Post Office, Santander UK through its acquisition of former building societies, Secure Trust, Shawbrook, Tesco and Virgin Money.
These newer entrants to the banking market want the Prudential Regulation Authority to be mindful of how regulation and capital requirements continue to impact on the ‘smaller players’.
The PRA has gone some way to removing barriers to entering the banking market by making it easier to apply for a banking licence.
But opinions gathered by the BBA reveal challenger banks felt the PRA had not gone far enough.
They wanted ‘proportionality’ by giving smaller banks dispensation in respect of certain rules where the cost of implementing them was greater than the impact.
Challenger banks said they are still being penalised over the issue of capital.
They have to use the Basel capital weighting system, rather than one based on their own business models, which uses standardised limits of capital to be held against loans depending on their risk.
But in its report the BBA said this put challengers at a disadvantage.
“This is particularly disadvantageous when lending to safer borrowers
(such as low loan to value mortgages), often requiring challengers to put
up multiples of capital against the same risk.
“This tends to mean that the challengers end up with riskier loan portfolios.”
The BBA wants to see a reform of the capital rules so challengers and established banks can lend using similar amounts of capital.
The association added: “The challenge is to ensure that the conditions are created in the banking sector so that all banks can compete on a level playing field.”
