Analysis: Britain's challenger banks boosted by capital rules revamp

Virgin Money UK

12/09/2024 13:47

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      Bank of England lightens capital rules on UK banks
    

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      Big banks dominate market as minnows struggle with red
tape
    

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      Smaller lenders consolidating in 2024 to try to compete
    

  
    By Sinead Cruise and Lawrence White
       LONDON, Sept 12 (Reuters) - Revised UK bank capital
rules have thrown a lifeline to smaller lenders struggling to
poach market share from Britain's biggest banks, boosting their
chances of offering more competitive rates in the 1.7 trillion
pound ($2.22 trillion) mortgage market.
    The Bank of England said on Thursday it would lighten
capital reforms on UK banks in a revised interpretation of
global rules, known as Basel III, aimed at bolstering the
financial system from future crises, echoing moves by regulators
in the United States.
    The amendments reflect the BoE's twin goals to make the
sector more resilient to shocks, while at the same time
supporting its competitiveness, with smaller lenders set to reap
considerable benefits, industry analysts and sources said.
    Britain's smaller banks have been pushing for regulatory
change that would allow greater use of internal models to
calculate risk weightings on loans, rather than standardised
models which can be more punitive.
    "We have taken the view that if Basel 3.1 is our best
estimate of the risk weights, then that is going to be true
whether large firms or small firms are doing the activity," Phil
Evans, BoE director of prudential policy, said in a speech.
    He pointed to "a significant narrowing of the gap" between
the standardised approach and modelled approaches that market
leaders would typically use, sending shares in some smaller
banks higher.
    Metro Bank  MTRO.L  was trading up 4.9% at 1134 GMT, while
smaller mortgage lender OSB Group  OSBO.L  rose 2.2% and Paragon
Group  PAGPA.L  was up 0.6%.
    "The package will boost competition among UK banks, by
broadening access to the more favourable internal ratings-based
approach and giving small domestic deposit takers interim relief
from the new rules," said Tom Callaby, a financial services
partner with law firm CMS.
    The UK's mortgage market is dominated by several domestic
heavyweights including Lloyds Banking Group  LLOY.L , NatWest
 NWG.L  and Barclays  BARC.L , and a smaller cluster of mutually
owned building societies led by Nationwide.
    The six largest lenders had a combined market share of 71.6%
of all mortgages in Britain at end-2023, according to a Reuters
calculation from Bank of England data.
    
    
    COSTS COULD FALL
    With base interest rates poised to fall against a backdrop
of limp economic growth and sticky inflation, industry sources
had predicted some so-called challenger lenders would likely
need to consolidate to survive.
    While some small banks have made a dent in the current
account market, few have made real headway in mortgage lending.
Rising compliance, technology and labour costs have heaped
pressure on returns, reinforcing a case for mergers of the
strongest brands to achieve scale.
    M&A activity in the sector has already soared in the last
year, with Nationwide swooping for Virgin Money  VMUK.L  and
Coventry Building Society joining forces with Co-Op Bank.
    But the changes announced on Thursday are likely to relieve
some of the operational pressures on smaller lenders, giving
them greater opportunity to build market share on their own. 
    Michelle Adcock, a director in KPMG's Regulatory Insight
Centre, said the BoE's new rules could reduce the smaller banks'
cost to income ratios, as they would likely need fewer and less
senior people to oversee mortgage lending reporting.
    "This is not about weakening the capital requirements on
smaller banks, but there are some reporting requirements that
are simply less relevant for them, and some of those have been
dialled down," she said.
 ($1 = 0.7664 pounds)

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 (Editing by Alison Williams)
 ((sinead.cruise@thomsonreuters.com; 020 7513 5026; Reuters
Messaging: sinead.cruise.thomsonreuters.com@reuters.net))