Brexit may offer opportunity to improve competition in banking
20 July 2016
The Treasury Committee publishes a letter from a group of challenger banks which outlines – among other things – the opportunity afforded by the EU referendum result to improve competition in the banking sector.
- Letter from challenger banks, dated 30 June 2016
- Letter from Andrew Bailey, Governor, Prudential Regulation, CEO, Prudential Regulation Authority, dated 26 February 2016
- Inquiry: Review of CMA work on Retail Banking Market
- Treasury Committee
Chair's comments
Commenting on the letter, Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Committee, said:
"Brexit poses risks; it may also create opportunities. Current EU legislation could be placing smaller banks at a disadvantage. This is because it risks imposing a 'one size fits all' approach to banking regulation.
The Bank of England and the Government both now need to consider whether the opportunity afforded by Brexit could enable the development of a regulatory regime less prejudicial to small and challenger banks."
Background
Challenger banks have long argued that they unfairly face steeper capital requirements than larger lenders, in part because they do not have enough capacity or resources to use the so-called internal ratings-based (IRB) approach to calculating credit risk.
On 16 November 2015, Andrew Bailey wrote to Mr Tyrie to highlight the challenges associated with the EU's new capital regime, stating:
"CRR/CRDIV is a maximum harmonising regulation and hence there are limitations to the discretion the PRA currently has. Mindful of our secondary objective given to us by Parliament (which, as I mentioned in my Mansion House speech, requires us to act in respect of the competitive implications of our own actions and inactions where we are satisfying our primary objective for banks), we recently published our response to the European Commission's consultation on the impact of the new capital regime.
In this response, we state that a “one size fits all” approach of common binding rules for all banks, no matter what their size, complexity or level of cross-border activity, can cause distortions given that the costs of regulation tend to bear more heavily on smaller banks. Rules that are more proportionate, are more likely to enable banks of different sizes and business model to compete on an equal footing across the EU than an approach which applied the same rules. This is an important issue and one that matters if we are to have growing new entrants and viable challenger banks. We want to put such a regime into effect and we will work closely with the European authorities to achieve this.
My view is that progress in this way on CRR/CRDIV is the most important element of removing distortions in the capital regime."
On Monday 18 January 2016, Mr Tyrie wrote back to Mr Bailey to ask him to quantify the competitive disadvantage under which challenger banks have to operate. Commenting at the time, Mr Tyrie said:
"The PRA has a competition objective - it should be guided by it.
Millions of consumers and small businesses have been getting a poor deal for decades because of inadequate competition and choice in banking. They will continue to do so, unless the PRA and the FCA supported, where necessary, by the Government, do whatever is required to reduce barriers to entry in the banking market to a reasonable level. So we need to know the scale of the disadvantages created by capital requirements.
The PRA may be prevented from making further adjustments to challenger banks' capital requirements under European law. It is reassuring that the PRA is calling for more proportionate capital requirement rules that reduce the burden on smaller banks.
The PRA should go further. It should publish an average of the required capital ratios of the incumbent banks compared to the new entrants.
This would help Parliament and the public to quantify the competitive disadvantage under which new banks are required to operate. It would also act as a tool for making progress on CRDIV with the European Commission."
Yesterday,in his appointment hearing with the Committee (10:12), Sam Woods, Mr Bailey's successor as Deputy Governor for Prudential Regulation and Head of the PRA, admitted that, with some qualification, 'there is a genuine issue here', and agreed with Mr Tyrie's request to 'keep it high on his agenda in his new job'.
Further information
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