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Proposals turn on so-called Pillar 2A capital, or the add-ons of capital individual banks must set aside above sector-wide minimums.
Newer lenders have complained that they are at a competitive disadvantage because of these calculations; a gripe taken up by politicians who have been keen to break the hold of “too big to fail” banks on Britain’s high streets.
Challengers, building societies and smaller lenders typically use regulators’ “standardised” models to calculate the riskiness of the loans they make, which usually require more capital to be held because newer banks have fewer years of data on the robustness of their lending.
Incumbents, by contrast, can use their own bespoke models, based on their experiences of losses on their loan portfolios, which ultimately tend to require less capital.
Official estimates have shown that the difference in the amount of capital set aside for the same residential mortgage can be as high as 960 per cent for those lenders using the standardised approach compared with bespoke models.
Sam Woods, the head of the BoE’s Prudential Regulation Authority, said: “This consultation is a major step forward for the PRA in facilitating effective competition, reducing capital requirements for eligible small firms. This will be good for competition and for safety and soundness.”
Paul Lynam, chief executive of Secure Trust, a challenger bank, said: “The simple fact of the matter is that the mechanical application of the standardised approach leads to huge disparity in terms of the capital requirements.” He added that the proposals “do not go far enough, but they’re a step in the right direction”.
Full article on Financial Times (subscription required)