CAPITAL requirements are too tough on challenger banks but not strong enough for established institutions, two such challenger banks told MPs and peers yesterday – despite fears that raising capital ratios further will hit lending to the real economy.
Virgin Money and Metro Bank claimed the current setup gives an unfair advantage to existing banking giants while stopping new firms taking market share.
“Over time, the capital ratio should reduce as risk reduces with longevity, it needs to be proportionate,” Metro Bank’s chief executive Craig Donaldson told the Parliamentary Commission into Banking Standards.
“But instead our capital ratio is significantly higher than 20 per cent, at least three times higher than most major high street banks, which carries significant costs and could be seen as anti-competitive.”
And Virgin Money’s Jayne-Anne Gadhia added their larger rivals should be compelled to hold more capital to level the playing field.
However, that call may not be taken up – economists have warned that the capital hikes already imposed on larger banks are damaging the economic recovery by holding back lending to households and businesses.
The pair also argued that while the process to set up a new bank is arduous, they do not want it made any easier for potential future competitors to enter the market – despite regulators’ and consumer groups’ hopes that more can be done to boost competition.
And they objected to the current payments systems setup, as they have to go through larger banks to access the basic infrastructure they need to operate as a financial services firm.
Donaldson claimed he often encountered problems with the faster payments system – despite there being no problem with the system at the core, or his operations, suggesting the large bank he uses as an intermediary is at fault.
He claimed the system needs a shake up to stop small banks from losing out to these problems.
“Across the world payments systems operate as a utility which banks link into,” he said.
“That creates a level playing field so banks can more easily differentiate their service to compete. Here, we have to rely on the biggest banks’ offerings and are forced to go to the lowest common denominator.”