IFR International - 03.11.2018

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FACILITY

Challenger banks hope

Brexit can level playing field

„ UK Smaller lenders say they are unfairly burdened by capital requirements

The UK’s departure from the European Union
may open the door to a relaxing of regulations
that hold back challenger banks from taking
on the big four in the small business lending
market.
Challenger banks have long complained
about the capital requirements introduced
after the global financial crisis, which they say
unfairly burden newer players at the expense
of established institutions, such as RBS, HSBC,
Lloyds and Barclays.
“We see Brexit as an opportunity for the
government and the Bank of England to ...
[determine] which aspects of legislation from the
EU they wish to maintain and which they wish to
reform,” said Rishi Khosla, chief executive officer
at OAKNORTH, in a testimony to the UK’s Treasury
Select Committee.
“We hope that this will result in more
proportionate regulation for new banks vs
incumbents, particularly in respect to capital,”
he said.
The Treasury is understood to be sympathetic
to the complaints, although in private
conversations with smaller banks it has said the
issue is not a high priority as Brexit negotiations
continue to be its main focus.

ONE SIZE DOESN’T FIT ALL
Since the financial crisis, around 50 firms have
been granted banking licences, yet the UK
market is still controlled by six banks who hold
an 89% share of the current account market,
according to accountancy firm PwC.
A key part of what is holding back new
participants in providing finance to small and
medium-sized enterprises (SME) is the way risk-
weighted assets (RWA) are calculated.
Larger banks are able to qualify to use their
own internal risk-based (IRB) model to calculate
RWA because they meet the data requirements
and are able to keep up with the high costs of
regulatory approval.
Smaller players, on the other hand, have to
use a standardised model, which can require
them to have 10 times as much capital on their
books compared with their larger competitors for
certain loans.
“By being able to apply our own model
regarding risk weighting instead of having to use
the standardised approach, we would have a
larger amount of capital at our disposal,” Khosla
said.
UK banks are required to follow the EU’s
guidelines on the Basel requirements that

hold all institutions to the same standards on

capital requirements, and many see a US-style

approach that allows for a blend of the IRB and

standardised model as the way forward post-

Brexit.

The Treasury Select Committee welcomed the

suggestion of post-Brexit regulation being better

tailored to the size of institutions when assessing

capital requirements; however, it warned against

weakening regulation designed to protect

banking customers.

“The UK’s exit from the EU should not herald

a new era of laxity in capital regulation, but

considers that there is an opportunity to consider

how the regime can better support competition

without compromising safety and soundness,”

the committee wrote.

THUMB ON THE SCALES

Former UK Prime Minister David Cameron

was behind a big push to diversify the banking

landscape after the financial crisis, but the

introduction of an 8% corporation tax surcharge

for banking institutions generating £25m in

profits annually has drawn criticism from the

challenger banks.

The tax was introduced under the assumption

that many challenger banks would remain

unprofitable for the foreseeable future as they

scaled up, but the rapid growth of institutions

such as OakNorth and digital-only, retail-focused

STARLING and MONZO suggests that threshold

could be hit sooner rather than later.

METRO BANK, one of the largest new entrants

into the market, didn’t see a quarterly profit

until the second half of 2016, six years after its

founding. In the first half of this year the bank

generated £24.1m in profit in the first half of

2018.

One source said the “counter-productive” tax

and “disproportionate RWA” measure is holding

back the very competition the Conservative

government wanted to see for the bigger banks

and expanded financing options for SMEs.

While there has been a relaxing of capital

requirements, the committee concluded that

reforms to the market need to go further,

including expanding the role of the Small

Business Commissioner, a body set up last year,

to improve awareness among SMEs of financing

options.

“More work is needed to bring meaningful

competition that will improve outcomes for

SMEs,” the committee wrote.

David Brooke