UK challenger banks call for easier access to BoE liquidity
Britain’s “challenger” banks are pushing for easier access to Bank of England liquidity and more favourable capital rules to help them compete with established lenders.
Small banks say they can be asked to provide substantial collateral when they use the BoE’s Funding for Lending facility, because of the risk in their loan portfolios. They also incur extra costs turning their borrowings into cash, according to a British Bankers’ Association report.
The challengers also say they can be forced to allocate four or more times as much capital as large banks when they offer low-risk mortgages, because they cannot use the models larger banks do to calculate capital requirements.
Andrew Salmon, chief operating officer of Arbuthnot Banking Group, said regulations were a “glass ceiling” for smaller banks.
“If you want a properly competitive marketplace you have to have the same rules for everyone,” he said in an interview. “When you have different rules for different players you skew the market. Though you are seeing a number of new small banks, on the whole they are in the niche areas.”
The financial crisis of 2007-9 led to consolidation in the sector, with failing banks taken over by surviving ones – most notably the purchase of HBOS by Lloyds.
The big four banks – HSBC, Royal Bank of Scotland, Barclays and Lloyds – provided about three quarters of the UK’s near 50m accounts in 2012.
However, there are new entrants to the market, such as Metro and Atom Bank, and 20 applications for banking licences are in the pipeline at the Prudential Regulation Authority, bringing hopes that the market could become more diversified.
James Barty, director of strategy at the BBA, said officials were failing to consider the impact of new regulations on smaller lenders. “Generally challengers say: we don’t have access to the same cheap funding as the big guys,” he said.
Smaller banks incur extra cost when they use the BoE’s Funding for Lending Scheme, because they need to enter into a repurchase agreement with a larger bank to turn the Treasury bills they receive into cash.
They are asking for changes to the FLS to make it more “challenger friendly”, as well as seeking reforms to the central and local government practice of only placing deposits at very large banks.
In addition, challengers tend to use standardised risk-weights, rather than the internal models that large firms have, to calculate their capital requirements. This leads to them being forced to put up much more capital when they lend.
The BBA argues that challengers should have access to an average of the internal risk weights of the biggest lenders. Smaller banks are also unhappy about the costs they incur to access the payments system, which is owned by the big incumbent banks.
The UK’s financial regulator agreed last year to smooth the path for new banks by allowing them to operate with common equity tier one capital of just 4.5 per cent of their risk-adjusted assets, instead of 7 per cent under the normal regime.
Source: FT
