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.
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.”
-
Temenos partners with ClearBank for cloud payments
Banking software company Temenos has formed a strategic relationship with ClearBank to provide banks with a faster route to market for real-time cloud payments...
-
Unity Trust Bank registers 34% rise in profits
Unity Trust Bank increased profits by 34% in 2019...
-
Believe the hype – why explainable AI is a trend that’s here to stay
Technology has become a ubiquitous part of our day-to-day lives...
-
Piloting tech updates: ‘The bigger the bank, the harder it is to get anything done’
In the latest Medianett filmed roundtable session, we discussed how important technology is in the banking space, and what impact the industry expects it to have on its businesses in the future...
-
What banks need to know about cloud security
One of the most common perceived concerns when adopting the cloud is the issue of security...
-
OakNorth sees 95% increase in pre-tax profits
OakNorth Bank has announced a 95% rise in pre-tax profits in 2019 to £65.9m, up from the £33.9m recorded in 2018...
-
Redwood Bank signs up to Women in Finance Charter
Redwood Bank has announced that it has signed up to the Women in Finance (WIF) Charter...
-
Masthaven launches digital Women in Leadership programme
Masthaven Bank has launched a new Women in Leadership digital development programme for female senior leaders...
-
Protecting against supply chain disruption and the domino effect
Disappointingly, many UK SME business owners don’t understand their supply chains...
-
Confused about which Isa to choose? Hopefully this mini-guide will help…
We are now firmly in Isa season, so you’re likely to read multiple articles about the most competitive Isa products in the market and how best to make the most of your Isa allowance before the end of the tax year...
-
Garden shed entrepreneurs contribute £16.6bn to the UK economy
Entrepreneurs who run their businesses from garden sheds contribute £16.6bn annually to the UK economy, according to a recent study...