18 January 2016

City AM: Time to give challengers a fair chance - Top City regulator urged to increase competition among banks

Treasury Select Committee chairman Andrew Tyrie revealed that he has written to Andrew Bailey, deputy governor at the Bank of England, asking for the prudential regulation authority (PRA) to disclose how much more money challenger banks have to hold compared to larger competitors.

Challenger banks have long argued that they unfairly face steeper capital requirements than larger lenders, in part because they do not have enough capacity or resources to use the so-called internal ratings-based (IRB) approach to calculating credit risk.

The PRA does not disclose the required capital ratios of individual banks, but Tyrie asked Bailey last week to “provide an average of the required capital ratios of the incumbent banks in contrast to new entrants”, saying: “This would help parliament and the public to quantify the competitive disadvantage under which new banks have to operate.”

Bailey said last autumn that the PRA would “work closely with the European authorities” to move way from a “one size fits all” regulatory regime that disadvantages smaller lenders.

“Rules that are more proportionate, are more likely to enable banks of different size and business model to compete on an equal footing across the EU than an approach which applied the same rules,” he said. “This is an important issue and one that matters if we are to have growing new entrants and viable challenger banks.”

The government and regulators have come under increased pressure to boost competition in British banking in recent months, especially after chancellor George Osborne introduced a new tax at the summer Budget which will take an additional eight per cent of banks’ annual profits, on top of the existing corporation tax. The new surcharge, set to go into effect this year, will apply to challenger banks and building societies currently exempt from the existing bank levy.

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