It is crucial that competition from new and smaller banks is not unnecessarily impeded by prudential regulation, according to the Treasury Select Committee’s chairman in a letter to the deputy governor for prudential regulation at the Bank of England.
In an exchange concerning the effect of the bank corporation tax surcharge on new retail banks, Andrew Tyrie told Andrew Bailey that millions of consumers and small businesses have been getting a poor deal for decades because of inadequate competition and choice in banking.
“The ‘challenger banks’ argue that they suffer a competitive disadvantage because – not having traded long enough to qualify for the lower risk weights available to established banks – they are required to hold more capital.
“This lowers their profitability, relative to the well-established big banks, and thereby reduces their attractiveness to investors.”
While he conceded that the Prudential Regulation Authority has taken steps to resolve this problem by adapting the capital requirements applied to new banks, the ‘challengers’ want further adaptations to compensate for the future impact of the new corporation tax surcharge on their bottom line.
Mr Tyrie added: “It is essential that the surcharge does not obstruct parliament’s efforts over the last four years to increase competition in the banking sector; the committee will want an assurance from the PRA that it has assessed its effect on competition in the retail sector.”
The pronouncement follows a similar warning made last month, where he urged the government to recognise potential unintended consequences for sector competition that could come from a proposed bank corporation tax surcharge.
Several institutions have already complained measures outlined in the Summer Budget would impact their ability to lend. The chancellor revealed in July that the annual levy UK banks must pay – based on the total assets on their balance sheets – would be gradually reduced in the next six years, falling to around 0.1 per cent from its 0.21 per cent level.
While this double taxation was a headache for established banks, the biggest losers could be the so-called ‘challenger banks’, such as Metro Bank and Virgin Money, according to experts.
Aldermore Group’s chief executive Phillip Monks stated that the introduction of an 8 per cent surcharge on UK banking profits above £25m, effective from 1 January 2016, “will increase our corporate tax rate and impact returns”.
On 14 July, the Competition and Markets Authority published a report on potential barrier to entry, concluding that new entrants’ lack of a track record and the relatively high fixed costs involved in developing and maintaining risk models, mean that it is difficult for them to become approved.
“For example, under current rules, banks wishing to become IRB [internal ratings based approach] approved need to demonstrate that they have been using advanced risk modelling approaches for at least three years prior to the IRB permission date,” the report read.