MP Andrew Tyrie wrote to Andrew Bailey, Deputy Governor for Prudential Regulation at the Bank of England, saying he wanted to know more about the scale of disadvantages challenger banks face by capital requirements.

“The Prudential Regulation Authority (PRA) has a competition objective - it should be guided by it,” said Mr Tyrie.

“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 Financial Conduct Authority (FCA) supported, where necessary, by the government, do whatever is required to reduce barriers to entry in the banking market to a reasonable level.”

In correspondence released by Mr Tyrie, he questioned the announcement of a corporation tax surcharge in the most recent Budget and its potential impact on new banks.  

He also asked whether it would close the retail banking sector to more competition from new entrants.

In response, the PRA said the new tax arrangement would only apply to firms with profits in excess of £25m, meaning that new entrants were unlikely to be affected.

The Chairman of the Treasury Committee also questioned whether adaptations to the PRA’s capital requirements had been effective in overcoming the competitive disadvantages new banks faced.

The PRA responded by saying it had been active in this field, and was working with the FCA to set up a New Banks Unit which would help challenger banks to navigate its requirements.

“These initiatives are all part of a broader policy agenda to promote the safety and soundness of the financial system (the PRA's primary objective) whilst facilitating effective competition (the PRA's secondary objective) and having regards to proportionality,” said Andrew Bailey, Deputy Governor and CEO of the PRA.

However, Mr Tyrie pointed out that: “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.”

Mr Tyrie also asked whether the PRA had seen a reduction in the number of firms applying for licences since the announcement of the new tax regime.

The PRA responded by saying that it continued to see a strong pipeline of prospective new banks, but it was too soon to know whether the tax changes have had any impact on the conversion rates to newly authorised banks.

However, Mr Tyrie responded in another letter by saying: “The rules need to be more proportionate and more likely to enable banks of different sizes and business models to compete on an equal footing across the EU, as opposed to a ‘one size fits all’ model.”

Rishi Khosla, CEO of OakNorth Bank, told B&C that there were too many barriers to entry for challenger banks and said his firm faced a number of major obstacles to win business from established lenders.

He did however say Mr Tyrie’s letter was a positive step.

“The fact that before Metro Bank entered the market in 2010, there hadn’t been a new banking entrant for 150 years is proof that there are still significant barriers to entry,” said Rishi.

“Having 15 new banks would be very positive for the market if they are not all at a disadvantage compared with the incumbents, are spread out across different target segments, and are established on a staggered basis. Otherwise you effectively reduce the probability of success for all of them.”

The PRA was contacted for comment, but had yet to respond at the time of writing.