New banks get special breaks

Tim Wallace
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NEW BANKS are set to get a break from tough regulations when they first set up, in a drive to encourage more competition in the sector, top officials revealed yesterday.

And the biggest banks may well see stricter rules on risk weightings in a drive to crack down on the very low weights they assign to mortgage loans which gives them an advantage over smaller rivals.

The finance watchdog is preparing a major report on barriers to entry in the sector, hoping to level the playing field between banks of different sizes and to give consumers more choice in what has traditionally been a market dominated by a few very large players.

Under the new plans, startup banks will be able to operate with a core capital ratio of as little as 4.5 per cent, getting extra time to raise that to the existing seven per cent minimum.

That compares with 9.5 per cent or 10 per cent for the largest banks which have to hold a conservation buffer and face an extra charge as globally systemically important financial institutions (G-SIFIs).

Previously the problem has been that new banks must raise large amounts of capital before being granted a licence by the regulator, but cannot raise capital easily without the licence – this measure is aimed at easing that tension.

“Broadly speaking, in the past we have had the same capital rules for new entrants as for existing banks. Indeed with some add-ons for new entrants, they were disadvantaged,” Financial Services Authority boss Lord Turner told the parliamentary commission on banking standards.

“This is a significant change to the relative capital regimes faced by new banks and by existing banks.”

But there will be other drawbacks for new entrants – they will not be allowed to pay dividends until they reach a capital ratio of seven per cent.

Meanwhile the risk weighting rules which count against small banks could also be altered.

Currently the standard model small banks use to calculate the capital they put aside against loans means they face a risk weight of 35 per cent on prime mortgages.

But larger banks can use their own models which can push the risk weight below 10 per cent.

“Bluntly, I am interested in the idea of whether we should put an underpinning under the low ratings model,” said Lord Turner, pointing to the 15 per cent minimum level the Swedish authorities have applied to all banks’ risk weightings on mortgage loans.