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Britain eases capital rules for new banks to boost competition

Britain’s ‘big five’ lenders – Royal Bank of Scotland, HSBC, Barclays, Lloyds and Santander – hold 83 per cent of retail accounts.


Startup banks in Britain will not need as much capital as their established rivals starting from April, Britain's Financial Services Authority (FSA) said, in a move to boost competition.

Under pressure from lawmakers to increase choice in a sector dominated by five banks, the FSA unveiled sweeping changes to authorize new entrants within six months, a process that currently takes a year or more.

Capital requirements will be lighter for the first three to five years, as long as a new bank can show that deposits are insured and that it can be wound up easily without destabilizing markets.

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Additional requirements that were previously applied to cover uncertainties in startup firms will be scrapped.

A new bank will need a core capital buffer equivalent to only 4.5 per cent of its risk-weighted assets, a level that will be increased as the bank expands.

This is well below the 7-per-cent to 9.5-per-cent buffer that applies to Britain's "big five" lenders with 83 per cent of retail accounts – HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Royal Bank of Scotland Group PLC and Santander UK PLC.

There will also be reduced liquidity requirements, the FSA said on Tuesday.

"We believe the changes will make a significant difference to the ease with which new firms can enter the U.K. banking system and, as a result, enable an increased competitive challenge to existing banks," FSA chairman Adair Turner said in a statement.

Andrew Tyrie, who heads a committee of lawmakers examining standards within the industry, said the FSA's plans appeared to be a step in the right direction.

"The lack of competition in banking has been reinforced by a regulatory regime favouring large incumbents. Customers have lost out as a result," he said.

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The Parliamentary Commission on Banking Standards will publish its own proposals for stimulating competition in its final report due in May.


New entrants have already begun to surface in the wake of the 2008 financial crisis, looking to fill the gap as the big banks focus on shrinking their balance sheets and building up capital reserves to meet new regulations.

Metro Bank PLC became the first new high-street lender to emerge for over 100 years when it was granted a banking licence in 2010. Other new challengers such as Aldermore Bank PLC and Shawbrook Bank Ltd. have also opened for business but have opted not to open branches.

Metro Bank's co-founder and chairman, Vernon Hill, welcomed the FSA's plans and said the move toward making a quicker decision on a banking licence was the most significant proposal.

"The biggest problem with the approval process is you had to get the entire bank up and running, including the IT system, before they gave you approval, so we had to invest a very substantial amount of money pretty much out of my pocket while we were all at risk," he said in an interview.

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Philip Monks, chief executive officer of Aldermore, also said the initiatives would make applying for a banking licence less onerous and would help new banks compete effectively.

"I think it's good to give startup banks more certainty in the process and to streamline the process," Mr. Monks said.

"It's all very well to have a number of new banks in the marketplace, but when they do get into the market, what you need to do is ensure that they have a level playing field," he added.

Aldermore was founded in 2009 with backing from private equity firms AnaCap and Morgan Stanley Alternative Investment Partners. Its loan book now totals over £2-billion ($3.1-billion), and it is the sixth-largest lender in the Bank of England's Funding for Lending Scheme (FLS), which provides cheap funds for lending to small firms and households.

New entrants still face a big challenge in taking on existing lenders, which have branches across the country and whose payment systems the startups still have to use.

Omar Ali, head of the U.K. banking advisory team at accountants Ernst & Young, said the changes were unlikely to be enough on their own to increase competition.

"Whilst consumers are willing to shop around for secondary banking services like loans, they remain reluctant to move their current accounts and savings to newer players," he said.

The Bank of England's director of financial stability, Andrew Haldane, has mooted a common payment systems platform that all banks could use to level the playing field for entrants.

The changes are among the FSA's last policy announcements before the regulator is scrapped on March 31.

Approval of new banks will be shared by two new regulators from April 1, with the standalone Financial Conduct Authority handling authorization of staff and the Prudential Regulation Authority at the Bank of England overseeing capital requirements.

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