Challenger banks face competition barriers

THE Chairman of the Treasury Committee has attacked Bank of England rules which leave challenger banks at a disadvantage.

MP Andrew Tyrie has said hurdles set out for banks entering the market are unreasonable causing consumers and small businesses to lose out due to a lack of competition.

These recently-launched banks are known as challenger banks because they set to compete with, or challenge, the bigger household names such as HsBC, Barclays and Lloyds.

In a letter to Andrew Bailey, the deputy governor for Prudential Regulation at the Bank of England, Tyrie calls into question ‘barriers’ which stifle challenger banks.

One such barrier is that smaller institutions are required to hold more capital against their loan book than established banks need to hold, making it much harder for them to offer competitive rates.

This requirement can become particularly insurmountable when challenger banks lend to safer borrowers – such as on low loan-tovalue mortgages – with them often having to put up 10 times more capital than established banks against the same risk.

Tyrie called for the Prudential Regulation Authority (PRA) deputy governor to publish information on the amounts of capital challenger banks are required to hold, compared to their bigger rivals.

He added: ‘This would help Parliament and the public to quantify the competitive disadvantage under which new banks are required to operate.’

Another problem is that Chancellor George Osborne introduced a new bank tax in the summer Budget charging an 8pc surcharge on profits above £25m.

Chief executives of challenger banks wrote to Osborne in september calling him to ‘level the playing field’ because the tax would hit them hardest. They claimed it could restrict lending to small businesses by as much as £6bn over the course of this parliament.

Bailey responded to say the PRA was ‘active’ in tackling the capital requirement hurdles that challenger banks face. But he noted that European laws limited the ‘discretion’ that the PRA has. He added that because the new bank tax only kicks in for profits over £25m, it would only impact upon larger challenger banks, and said start-ups would ‘not be materially impacted’.

Tyrie said: ‘Millions of consumers and small businesses have been getting a poor deal for decades because of inadequate competition and choice

‘They will continue to do so, unless the Prudential Regulatory Authority and the Financial Conduct Authority supported, where necessary, by the Government, do whatever is required to reduce barriers to entry in the banking market to a reasonable level.

‘so we need to know the scale of the disadvantages created by capital requirements.’