Good news for smaller lenders!

Tony Ward

February 28, 2017

Tony Ward is chief executive of Clayton Euro Risk

There was good news last week.

I was very pleased to see that the Bank of England is to take steps to help smaller banks compete against their larger high street rivals.

Officials are looking to reduce the disparity in capital rules that makes it more expensive for smaller banks to lend (CP 3/17).

In a statement, the Prudential Regulation Authority said that it would refine its capital rules, which give big banks far more leeway to decide how much of a loss-buffer they need to have against any given loan.

In contrast with smaller lenders, who must take a ‘standardised approach’ whereby risk weightings are pre-set for everything from mortgages to corporate loans, large banks use their internal models to determine the correct capital requirements for their lending.

In effect, this means that smaller banks have to assign a higher risk weighting against exactly the same quality of loan compared with a bigger rival, which is clearly wrong.

The new regulation looks to be aiming to set things right – a refinement that’s long overdue.

Sam Woods, deputy governor for prudential regulation, said that reforming banks’ capital frameworks would be a ‘major step forward’ in improving competition.

Simon Kirby, economic secretary, said: “The PRA’s consultation is a positive step in closing the gap between challengers and big banks. We are determined to put competition at the heart of our financial services so that the sector can truly deliver for consumers and businesses across the UK.”

I totally agree.

This will be a good thing for the mortgage market. I’m all for increased competition and, on the back of this, I see the development of better lending products, which can only be good for the consumer.

The proposed implementation date of 1 January 2018 can’t come soon enough.

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