New banks allowed lower capital reserves

REGULATORS unveiled a new drive to encourage more competition in the banking sector today by allowing start-up banks to hold lower reserves of capital.

At the heart of the changes will be much less stringent capital and liquidity requirements for new entrants, as well as a significantly faster timetable for regulators to process banking licence applications.

Publishing their joint review into current barriers to entry, the Financial Services Authority and the Bank of England said fledgling banks will only need a core tier one capital ratio – capital backing as a percentage of their loans – of 4.5 per cent. That compares with between 7 and 9.5 per cent for bigger, established banks.

The BoE and the FSA also revealed they would no longer apply for new entrants additional “add-ons and scalars” previously designed “to reflect the uncertainties inherent in start-ups”.

The organisations said: “These requirements often resulted in capital requirements for start-ups being higher than for existing banks.”

They said all new banks would benefit from a recent reduction in liquidity requirements, and that there would be improvements to the existing bank authorisation process under the two organisations that will replace the FSA from Monday, the Prudential Regulatory Authority and and the Financial Conduct Authority.

Those two will aim to complete all applications for a licence, “including a challenge session”, within six months. An FSA spokesman this process had traditionally taken “between one and two years”.

Lord Turner, the FSA’s chairman, said the review had made “some bold changes, ones that respond to the difficulties faced by applicant firms”.

He added: “We believe the changes will make a significant difference to the ease with which new firms can enter the UK banking system and, as a result, enable an increased competitive challenge to existing banks.”

The FSA spokesman said if the hundreds of banks being divested by Lloyds and Royal Bank of Scotland ended up in the hands of new banking entrants as opposed to existing banks then the much lower capital ratio requirements would apply to them.

The moves were welcomed by business and politicians as bringing more competition to the banking high street.

Colin Borland, a spokesman for the Federation of Small Businesses in Scotland, said: “Obviously this is particularly needed north of the Border, where three quarters of the small business lending market is dominated by Royal Bank of Scotland and Lloyds.”

Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards, said it “appears to be a step in the right direction”.

A spokesman for the British Private Equity and Venture Capital Association, said: “This is excellent news and will help the government achieve its stated aim of encouraging more competition in high street banking, and could help boost lending to both consumers and businesses.”

Anthony Thomson, founder and former chairman of Metro Bank, said the regulatory moves “should be heralded as a watershed moment for banking, and not before time”.