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Tuesday, October 17, 2017

Bank of England capital requirements
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60% believe capital requirements increase will prevent new bank entrants

Tom Belger | 7:44 Wednesday 26th July 2017

The new capital requirements will make competition with the large banks more difficult, one challenger has warned.

The comment comes following a recent poll conducted by Specialist Banking which found 60% of financial professionals felt the increase in capital requirements would prevent new bank entrants.

The remaining 40% did not believe the rise would stop new entrants joining the banking sector.

New bank entrant polls

Last month, the Bank of England’s Financial Policy Committee (FPC) proposed to the PRA to exclude claims on central banks from the leverage exposure measure in the UK leverage ratio framework; and compensate for the resulting reduction in capital required by the leverage ratio framework, by increasing the minimum requirement from 3% to 3.25%.

These proposals were relevant to PRA-regulated banks and building societies with retail deposits equal to or greater than £50bn on an individual or a consolidated basis.

The proposals aim to ensure that the leverage ratio did not act as a barrier to the effective implementation of any monetary policy action which led to an increase in central bank reserves.

The FPC said it could also increase the financial sector’s ability to cushion shocks to the financial system and the provision of credit to the real economy by drawing on central bank liquidity facilities if needed.

 

Impact on new bank entrants

Will German, chief risk officer at Cambridge & Counties Bank, felt that since the financial crisis, capital requirements had increased significantly.

“Increasing minimum capital requirements changes the risk-reward equilibrium for investors by reducing banks’ ability to lend, but improving their ability to withstand losses.

“There does come a point at which increasing capital requirements could make the return on equity unattractive to investors; however, the strong results posted by the UK niche bank sector suggests that streamlined and prudently managed banks continue to provide excellent returns to their shareholders.”

Alex Letts, founder and chief unbanking officer at U, felt the new capital requirements were essential for system stability, but that there was a consequence.

“But the consequence is that it makes competition with the large banks more difficult.

“The model of a free current account subsidised by lending, combined with the increased capital requirements, makes me wonder how any new bank entrant can hope to become profitable or can continue to raise capital.

“New models will emerge like U where lending is left to big banks and, instead, competition for the banks is in the heartland current account space.”

Will felt other factors could impact new entrants and said it didn’t consider that the recent capital changes would make the sector less attractive to new entrants.

“We do, however, think it likely that other factors – including increased competition, the macro-economic environment and regulatory expectations – will reduce the number of new bank launches.”

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