Bank of England to ease rules for small lenders to boost competition
The central bank would assess a lender’s business plan as it approaches the 15-billion-pound threshold and issue a bespoke transition path
Smaller banks will be given more time to reach targets for issuing debt to shore up their defences in a crisis, the Bank of England said on Thursday as it seeks to boost competition in a banking sector long dominated by a handful of lenders.
Banks are required to issue MREL, or minimum requirement for own funds and eligible liabilities, which is a form of debt that can be writen down to absorb losses and avoid repeating the 137 billion pound ($188.6 billion) taxpayer bailout of lenders in Britain during the financial crisis more than a decade ago.
The targets were set under European Union rules, which Britain now can amend more easily ater leaving the bloc last December.
“Making it easier for firms to grow into MREL responds directly to firms’ concerns about barriers to growth created by the step up in MREL requirements as firms expand their balance sheets,” Bank of England Deputy Governor Dave Ramsden said in a statement.
The central bank has authorised 27 new banks since 2013, but Lloyds, Barclays, HSBC and Natwest continue to dominate retail lending and the so-called challenger banks have said that blunt thresholds for issuing MREL create a “cliff edge” that holds them back from building market share.
The BOE proposed replacing its indicative threshold of 15 billion to 25 billion pounds with a notice period seting out when a lender can enter transition to its MREL targets if the company grows beyond 15 billion pounds in total assets.
The central bank would assess a lender’s business plan as it approaches the 15 billion pound threshold and issue a bespoke transition path.
“The banking industry must now assess the implications of the new regime in terms of ability to compete, and highlight any potential challenges to how they serve customers or change their business models as a result,” said Tom Groom, a financial services partner at consultant EY.
The proposals for an extended transition path directly respond to calls for change, the Boe’s Ramsden said.
“They are inherently flexible and agile as they allow for a further extension if unforeseen circumstances demand it,” Ramsden said.
Challenger lenders Metro Bank, TSB and Co-op Bank did not respond immediately to requests for comment.
INFLATION PRESSURES: A current spike in prices is unlikely to create longer-term inflation pressures but central bankers should keep a close eye on job market shortages ater the coronavirus pandemic, Bank of England Deputy Governor Ben Broadbent said on Thursday.
Splits have emerged among top policymakers at the British central bank on the need to remove stimulus for the economy, and Broadbent said he disagreed with the view of those such as Michael Saunders who fear above-target inflation will persist.
“While we know it’s going to go further over the next few months, I’m not convinced that the current inflation in retail goods prices should in and of itself mean higher inflation 18-24 months ahead, the horizon more relevant for monetary policy,” Broadbent said in a speech.
Saunders and Deputy Governor Dave Ramsden surprised investors last week by saying the time for tighter policy might be approaching.
But another MPC member Jonathan Haskel said reducing support for the economy was not the right option for the foreseeable future and Catherine Mann - who joins the BOE as a policymaker on Sept. 1 - warned against curbing stimulus too soon.
Financial markets currently price in a first rate rise by the BOE - to 0.25% from 0.1% - by June next year. Bond yields fell slightly ater Broadbent’s remarks.
Last month, the BOE revised up its short-run inflation forecast in June to above 3% and it is due to release new - and probably higher - forecasts on Aug. 5 ater its next meeting.
Broadbent said past spikes in British inflation to up to 5% caused by oil price rises or currency weakness subsided quickly.
Post-pandemic shortages of raw materials and components such as lumber and semiconductors were now easing and goods prices were likely to be pulling down on inflation rather than pushing it up in one or two years’ time, he added.
However, Broadbent said the pandemic’s legacy might worsen shortages of some types of worker, for example if accelerated digitalisation raised demand for sotware developers.
Very high levels of job vacancies, despite millions of workers still being on furlough, indicated at least a temporary mismatch between workers’ skills and employers’ needs.
“I’m more uncertain about this process, and the implication for costs in aggregate, than about the transitory nature of goods-price inflation,” he said.
Britain’s job market usually adapted fast to economic shocks and had not been a source of inflation pressure in the past but it was too soon to be sure this would continue, Broadbent said.