New plans to cut the red tape hurting UK’s challenger banks

Tim Wallace
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WELL established small banks will be the next group to benefit from a review of the extra-tough capital rules that are holding back lending and stifling competition in the sector, City A.M. understands.

New banks and the UK’s biggest banks both get some reliefs from the more stringent rules, meaning middle-sized lenders have to hold a lot more capital than either other group, even against loans of exactly the same quality.

The differences can be extreme – big building societies can hold five per cent capital against a prime mortgage, when small banks hold 35 per cent.

It is understood that the Prudential Regulation Authority, headed by Andrew Bailey, will review the system in an effort to level the playing field.

Although the main risk weightings on the standard model are set at a European level and cannot be easily changed, the add-ons given to banks by UK authorities may be cut down.

The proposal comes as part of a drive by regulators and politicians to open up the market to more competition. Challenger banks welcomed the plan.

“What we’re seeing now is a public acknowledgement that the regulatory capital imposed on challenger banks is disproportionately high relative to larger banks,” Paul Lynam, chief of Secure Trust Bank, told City A.M.

“It is inequitable for challenger banks to end up as the challenged banks – big banks and new banks have lower requirements, and we in the middle have higher requirements that everyone else.”

“It is a disproportionate burden that makes it almost impossible for banks like us to compete.”