Small lenders fear new rules only aid giants

Tim Wallace
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FINANCIAL regulators are failing to promote competition in the banking sector and perpetuating the “too big to fail” problem, a small bank claimed yesterday, by favouring big lenders under new capital requirements.

Paul Lynam, chief executive of Secure Trust Bank, pointed to Sir John Vickers’ proposals allowing a large bank to risk-weight mortgages at five per cent when determining capital. A smaller firm would have to hold 35 per cent – which Lynam said is a barrier to growth.

“If challenger banks cannot compete on a like-for-like basis, the capital requirement methodology forces them to operate in niches and they can never grow to the scale to take market share from big banks,” Lynam said. “And that is compounded by big banks being allowed to buy challenger banks – for example, Barclays buying some of ING’s business.”

The Financial Services Authority’s Andrew Bailey acknowledged the problem exists, but argued he is trying to address it. “Twenty-five years ago in a no-failure regime, the probability of small banks failing was assessed to be higher than for large banks, and therefore they were asked to hold more capital,” Bailey said at an event to discuss planned rules for the new Financial Conduct Authority.

“But now we are asking large banks to hold more, because they cause more damage when they fail. And in a world where we can be more confident about resolution – and for small banks, we are moving rapidly towards that – we can take a different view of the relationship between small and large banks.”

But Lynam still fears his bank is unfairly hit by the rules.

“I was encouraged by Andrew Bailey’s answer, but the question is how quickly that happens,” he told City A.M. “All the time the big banks have this unfair advantage, it limits the chance for small banks to give customers more choice, as well as to eat away at the too big to fail problem.”

Elsewhere at the event, regulators said the forward-looking, judgement-based approach to regulation should fit in well with similar plans being proposed in the EU and the US.