Britain's challenger banks boosted by capital rules revamp
Bank of England lightens capital rules on UK banks
Big banks dominate market as minnows struggle with red tape
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)
"Big 6" dominate Britain's mortgage market https://reut.rs/4dWuzR9
Editing by Alison Williams
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
