Blackfriar: Yorkshire would benefit from new powers that reflect region's diversity

CYBG, which owns Yorkshire Bank and Clydesdale Bank, announced plans earlier this month to become the UK’s leading challenger bank with the £1.6bn takeover of rival Virgin Money.'‹CYBG has tabled a tentative takeover of Virgin Money, which is reviewing the proposal. '‹'‹The '‹Yorkshire'‹ Bank owner said the combination would create the UK’s leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks.CYBG said the Virgin Money brand would play a significant role in the combined group, with Virgin Money shareholders set to own around 36.5'‹ per cent'‹ of the new business.The deal could mean a major payout for founder Sir Richard Branson whose Virgin Group holds a controlling stake in the lender. A formal offer must be tabled no later than 5pm on June 4.EJF Investments (EJFI), which focuses on financial companies including regional banks, said both CYBG and Virgin Money - along with their rivals - have provided a welcome change to the UK banking landscape. Genuine, much needed competition has been lacking from the sector due in part to the regulatory regime’s one size fits all approach. However, EJFI believes scale remains key, despite all we heard about large banks being "too big to fail" during and post the financial crash. For new entrants, it appears that the only way to build meaningful market share is to have more market share in the first place. EJFI said this stifles true competition. Peter Stage, CFO of EJF Investments, said CYBG’s proposed merger with Virgin Money is largely a defensive move, provoked by a market and regulatory regime that requires scale in order to compete in the banking sector given the domination of the large UK banks. He expects to see more transactions of this kind to take place, but that is not to say that the larger resulting entities could provide any material challenge to the large incumbents.EJFI said that while the trend towards consolidation may be helpful in terms of giving challengers the ability to compete more effectively at the margins, regulators and politicians could consider initiatives to promote growth, innovation, and a more effective financial services sector.For example, one avenue to reduce the current housing deficit could be to soften certain regulations around development finance products. Hammad Khan, EJF Investments' senior managing director for Europe, said there is a real need for specific financing options that will help people buy houses, but this is also the case when it comes to building them too. Challenger banks can potentially play a vital role on both fronts, making our current housing market more efficient. These entities often have the required skills and focus to bring real change and innovation.Mr Khan said another viable approach to improve the situation could be to hand more powers to UK regulators that reflect the regional diversity of the UK when considering how much capital banks need to set aside against their loans. He said European legislation renders this difficult at the moment, but that may change. Furthermore, a funding scheme could be created that allows smaller banks to get ahead of the massive advantages that larger banks currently have due to their domination of the current account market. "We feel areas such as Yorkshire may benefit directly," said Mr Khan.Mr Stage said US regulations place smaller banks in a much better place, meaning that they can better lend to local businesses and customers. US regulatory actions indicate that smaller banks are not a systemic threat. "We can see the positive effect of this regime through the success of EJF Investments’ approach," he said. "Accordingly, EJF Investments is currently focused on opportunities in the US, but if smaller UK banks are given the help we feel is required to compete fairly, then local and regional economies like Yorkshire could be the ones that benefit the most."