The CMA has come under pressure to come up with remedies to improve competition within the banking sector with capital requirements seen as a disadvantage to many new entrants.

Aldermore Bank, Charter Savings Bank, Close Brothers, Hampden & Co Bankers, Metro Bank, Secure Trust Bank, OneSavings Bank, Shawbrook Bank, Tesco Bank and Paragon Bank have now penned a letter to Alasdair Smith, Chairman of the CMA, to express their disagreement with the authority’s findings.

“We are disappointed that the CMA does not intend to further consider this issue as a part of the ongoing review, or intend to take any action beyond liaising with HM Treasury, the Bank of England and the PRA [Prudential Regulation Authority] after making its final report,” wrote the group of challenger banks.

“We acknowledge that the CMA’s powers are limited and that forcing changes to capital requirements set by international institutions is not directly possible.

“This limitation might give the impression that the matter is not worth pursuing further.

“Similarly, given the CMA’s statutory focus on the SME and PCA markets, capital rules relating to mortgages might seem less relevant.

“We disagree with this assessment.”

The challenger banks felt that even though mortgages weren’t the focus of the CMA review, they believed that if smaller banks couldn’t engage in low-risk mortgage lending due to the prevailing capital rules, it would reduce the incentive on them to look to source low-cost funding such as personal and business current accounts (PCA and BCA).

“Conversely, proportionate capital rules that allow smaller institutions to provide low-risk mortgage lending economically will increase their need for low-cost funding sources and increase competition to attract PCA and BCA customers.

“Furthermore, as we have stated previously, the lack of a proportionate regime is a key constraint on challenger banks’ ability to compete with incumbents that have access to historical data and employ IRB risk weights.”

The current rules meant challenger banks would have to hold higher aggregate capital, unlike their larger competitors.

The letter stated that this hampered challenger banks’ ability to attract investment and expand their business and felt tackling this underlying issue was vital to achieve a genuine change in banking competition.

“The CMA should therefore continue its work in this area with a view to making a clear recommendation in its final report that the PRA and HM Treasury should actively pursue a proportionate capital regime with international institutions.

“A clear recommendation from the CMA will help add momentum to the project to improve the proportionality of capital rules and ensure that competition issues are put at the top of the reform agenda.”