Post-Brexit rules on capital for challenger banks will only hurt the industry more
The last week of upheaval in the banking world is proof of the importance of a competitive landscape; we must do more to ensure a level playing field for smaller banking players, writes Karen Bradley
One of Britain’s great economic success stories since the global financial crisis has been the emergence of a vibrant and dynamic challenger bank market.
Names never previously seen on Britain’s high streets like Metro Bank and Virgin Money, alongside a re-modelled TSB, were the first warning signs to the top five banks that competition could be a healthy thing and a major priority for government and policy-makers.
That early progress was boosted by the PRA’s new authorisation regime introduced in 2013 encouraging a whole raft of new players and specialist lenders to enter the market.
And with the UK’s focus on developing the country as one of the world’s leading fintech sectors we’ve seen an explosion of neo-banks, like Monzo, Starling and Atom.
Nowhere is the competitive change in the banking landscape more obvious than in the SME lending market. The diversity of new and growing SME lenders such as OakNorth, Allica, Shawbrook and Oxbury is plain for all to see.
New data from the British Business Bank last month revealed that for the first time in living memory, challenger and specialist banks now account for 55 per cent of new SME lending in the UK, more than the previously dominant top five banks combined.
Since the PRA introduced its new banks authorisation regime, new banks’ lending to SMEs has grown by almost 150 per cent.
Having said that, post-Brexit rules are still holding back challenger banks’ ability to grow through a lack of proportionality in our regulatory regime. The current approach makes it impossible for challenger institutions to compete on a level playing field with the big, established banks.
You need only look at the last week of upheaval in the banking world to see the importance of having a competitive landscape. This is a critical moment for the long-term health of the economy.
Plans from the PRA to reform the Basel International banking standards, which govern crucial areas like capital adequacy and liquidity, would be a massive shake up to lending rules in the UK.
Billed by some as an opportunity to unlock the so-called Brexit dividend, the PRA’s consultation runs to a weighty 400 pages.
But for small firms, these new rules could impede the ability of challenger banks to supply critical finance by requiring them to hold more capital when lending to SMEs.
And there’s confusion as to why capital requirements could be higher for lending secured on smaller firms’ property assets, than for totally unsecured lending – a position that seems entirely illogical.
Analysis from economic experts Oxera, presented to the APPG on Challenger Banks this week, has suggested that up to £44bn of SME lending is at risk of being lost to the economy as a result of the proposed changes.
While the PRA’s primary objective is to ensure the safety and soundness of financial firms, it appears the proposed new rules could actually increase incentives for smaller banks to take on riskier lending.
And if the impact to SME lending is anywhere near the £44bn experts believe it could be, then the new rules would also cut across the PRA’s objective to facilitate competition in the banking market and obligations to take into account the government’s economic strategy.
Clearly nobody should be arguing for the regulators to simply loosen capital requirements. The recent Silicon Valley Bank debacle vindicates both the Bank of England’s new resolution regime and the PRA’s approach to liquidity rules (which are different and arguably more effective than in the US).
But SVB also demonstrates the importance of rules fully reflecting the risks being regulated.
Regulators and politicians will quite rightly want to consider the issues sitting behind the SVB episode. But those difficulties had nothing to do with the bank’s lending activity, and its failure should not impede future lending for domestic firms.
This is a once-in-a-generation opportunity to show how UK financial services can flourish post-Brexit, to the benefit of a more competitive banking sector, and new firms ready to breathe fresh life in the UK economy.