BoE backs easing of capital rules at small lenders

Andrew Bailey (Picture: Tony Johnson)
Andrew Bailey (Picture: Tony Johnson)
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The Bank of England plans to boost mortgage competition by cutting the amount of capital smaller lenders - including building societies - have to set aside to cover mortgage defaults.

The Government is keen to increase competition in banking, as just four lenders - HSBC, Lloyds, RBS and Barclays - make up 77 per cent of high street accounts and dominate mortgage lending.

Bank of England deputy governor and PRA chief executive Andrew Bailey said that one way to do this will be to help new banks compete better in offering home loans.

Currently, large banks can use their own models for calculating how much capital to set aside against mortgages.

Smaller lenders must use a method set out by regulators, known as the standard approach.

In-house models are more sensitive to risks than the standard approach and come up with a lower capital requirements.

“The consequence of this is that smaller banks and building societies cannot compete effectively in lower risk asset markets such as prime mortgages because the capital requirements are too far apart and in favour of large banks,” Bailey told a financial services audience. “This forces them into riskier assets and undermines their position.”

The Bank is now seeking to persuade the European Union to change its rules to ease the burden on smaller lenders. It is also helping smaller lenders get approval to use their own models for mortgages.

The Brussels-based Basel Committee, which is responsible for banking supervision in the EU, has begun a consultation on its bank capital rules to see whether changes could help lenders provide more funds for the economy.

The BoE has told the EU it wants a more tailored approach to small lenders’ capital requirements.

A spokeswoman from the Building Societies Association (BSA) welcomed Mr Bailey’s comments.

In its response to the latest Basel consultation, the BSA argued for a differentiated approach to regulation “which distinguishes highly interconnected international banks from plain vanilla community banking”.

“It is important the Commission and regulators consider the appropriateness of any new regulation to small simple banks first, and not as an afterthought,” she added.