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Treasury Select Committee investigates challenger bank capital barriers

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  • 19/01/2016
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Treasury Select Committee investigates challenger bank capital barriers
Chairman of the Treasury Select Committee Andrew Tyrie has asked the regulator to provide statistics on the capital required of banks, in order to assess disadvantages facing the challengers.

In a letter to Andrew Bailey, chief executive of the Prudential Regulation Authority (PRA), Tyrie (pictured) said he would like the PRA to provide an average of the capital required of existing banks compared to new ones.

He said this would help Parliament and the public assess the disadvantages facing challengers.

Commenting on the correspondence, he said: “Millions of consumers and small businesses have been getting a poor deal for decades because of inadequate competition and choice in banking.

“They will continue to do so, unless the PRA and the FCA supported, where necessary, by the government, do whatever is required to reduce barriers to entry in the banking market to a reasonable level. So we need to know the scale of the disadvantages created by capital requirements.”

The Basel Committee has released a consultation paper which sets out different levels of capital requirements lenders need to hold in reserve for residential mortgages and buy to lets, depending on loan-to-value.

If approved, small players will be forced to hold more capital in reserve, while the UK’s largest lenders are trusted to set their own levels, as they are seen to have more data to rely on.

In October, Tyrie wrote his first letter to Bailey, saying challenger banks wanted the Treasury to reconsider the method used to calculate capital requirements.

They said they were put at a disadvantage due to the difficulty in meeting the conditions required in the standardised approach. The alternative approach, the internal ratings-based (IRB), can be used by larger banks which are allowed to use their own risk parameters.

Citing a report by the Competition and Markets Authority, Tyrie wrote that the IRB approach is likely to lead to significantly lower capital requirements than the standardised approach on a like-for-like basis.

In a response, Bailey said the PRA has introduced a more tailored approach to calculating firm specific capital planning buffers for newly authorised banks.

The approach uses the cost of wind-down rather than stress testing, which is the more normal approach for established banks.

The change was introduced to ensure new banks with fast growing balance sheets are not disadvantaged by the buffer calculation.

The result is more proportionate capital requirements which reflect the characteristics and circumstances of the banks, Bailey wrote.

The PRA and FCA will also be setting up a New Banks Unit (NBU) to help challenger banks meet the PRA’s requirements.

The PRA said using the same approach of rules for all banks, regardless of their size, complexity or level of international activity can cause damage as the cost of regulation often affects smaller banks more heavily.

“Rules that are more proportionate are more likely to enable banks of different sizes and business models to compete on equal footing across the EU than an approach which applied the same rules,” Bailey wrote.

“This is an important issue and one that matters if we are to have growing new entrants and viable challenger banks,” he added.

Commenting on the correspondence, Tyrie said: “The PRA may be prevented from making further adjustments to challenger banks’ capital requirements under European law.

“It is reassuring that the PRA is calling for more proportionate capital requirement rules that reduce the burden on smaller banks,” he wrote.

Bailey said the capital requirements regulation and directive (CRR/CRD IV) was the most important element of removing distortions in the capital regime.

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