City watchdog hits banks with funding red tape

The Prudential Regulation Authority has dealt a cruel blow to the growth of challenger banks in the UK, with the announcement of a consultation bill on increasing the quality of capital reserves.

The proposals aim to increase Common Equity Tier 1 (CET1) capital reserves from 4 per cent to 4.5 per cent from 2015, in a bid to align its rules with the implementation of the EU’s Capital Requirements Directive (CRD IV).

The City’s new regulator has published enhancements to the capital adequacy rulings, with the total allocation rising from 5.5 per cent to 6 per cent.

The remaining capital requirement is made up of ‘pillar 2’ allocations, which is divided into capital held against risks not captured or not fully captured by the regulations (2A) and risks to which a firm may become exposed over a forward-looking planning horizon (2B).

The proposals strike yet another blow into the growth of the UK banking sector, while many high street lenders will appear not to be affected - the smaller challenger banks are once again shackled in their ability to remain competitive with the larger names of the industry.

Responding to the consultation announcement, Ian Henderson, CEO of Shawbrook Bank, said: “The PRA’s consultation paper on capital is detailed. At a high level the PRA indicates that they will require higher levels of better quality capital. Shawbrook’s capital base is already of the highest quality with only CET1 within the capital structure, and the capital levels held are materially higher than those suggested by the consultation paper.

“We are supportive of the need to hold appropriate levels of high quality capital and demonstrate this in our capital structure. We would also like to see a levelling of the capital requirements between large banks and challenger banks to promote more effective competition.”

Speaking on the changes to liquidity level requirements, Craig Donaldson, CEO of Metro Bank, said: “We need a level playing field for all banks, where capital and liquidity levels are set within the context of common industry standards, rather than levels varying for new and existing banks.

“As a result, we urge the regulator to accept that the level of risk in a new bank falls rapidly compared to the level of risk in a more established bank, which we would expect to remain fairly constant. Therefore regular evaluation is essential to ensuring that capital requirements are set at the correct (and declining) level.”

Under the current system, pillar 2A can be met with any regulatory capital, but the Regulator is now suggesting that financial institutions should meet this requirement with at least 56 per cent core equity ‘tier 1’ (CET1) capital.

The PRA concludes that this will bring the capital quality of pillar 2A in line with that of pillar 1, with a view to consulting on whether from 1 January 2016 onwards - the pillar 2A requirement should be met with CET1 only or a different combination of capital.

Speaking on the proposals, Andrew Bailey, Chief Executive of the PRA, said: “Well capitalised and resilient firms are crucial for ensuring financial stability and supporting UK growth.

“The PRA has already acted to increase both the amount and quality of capital held by firms, reflecting our determination to improve the stability of UK firms after the crisis. This has put UK firms in a good position to meet the new requirements whilst continuing to provide banking services and support lending to the real economy.”

The PRA will publish a policy statement with feedback, finalised rules and final supervisory statements in December 2013.

The CEO of Metro Bank added: “Metro Bank proposes that capital and liquidity levels are set in line with a required industry standard, based on the knowledge and data collected by the regulator, and implemented through clear government policies.

“For a market to be truly competitive, every bank must be held to the same capital and liquidity standard if they are expected to take the same level of risk. In the first 3 – 5 years of a new bank’s life, the regulator should commit to holding frequent (bi-annual) reviews of both capital and liquidity requirements for new banks to ensure that they reflect the levels of growth and change experienced by new companies.

“These reviews would be short-form, i.e. rigorous but concentrating only on key elements, but still incorporate the appropriate corporate governance needed to ensure that capital and liquidity are set accurately. This would ensure that the capital and liquidity burdens on new banks are not excessive but proportionate to the actual risk being run.”