LONDON, Sept 12 (Askume) – Revised British bank capital rules have become a lifeline for smaller lenders struggling to take market share from Britain’s biggest lenders in the $1.7 trillion pound ($2.22 trillion) mortgage market.
The Bank of England said on Thursday it will ease capital reforms for British banks in a revised interpretation of global rules known as Basel III , which aim to strengthen the financial system against potential future crises.
Industry analysts and sources said the amendments reflected the Bank of England’s dual aim of making the sector more resilient to shocks while boosting its competitiveness, with smaller banks set to benefit disproportionately.
Smaller UK banks are pushing for regulatory changes to allow greater use of in-house models to calculate risk weightings for loans rather than using standardised models which can be more punitive.
Phil Evans, head of prudential policy at the Bank of England, said in a speech: “We believe that if Basel 3.1 is our best estimate of risk weightings, whether large or small firms are doing this activity, it will be correct.
He said that “the gap has narrowed significantly” between the standardised approach and the model approach commonly used by market leaders, leading to a rise in the share prices of some smaller banks.
Metro Bank (MTRO.L) was up 4.9% by 1134 GMT , small mortgage lender OSB Group (OSBO.L) was up 2.2% and Paragon Group (PAGPA.L) was up 0.6%.
Tom Calabi, financial services partner at law firm CMS, said: “This scheme will boost the UK economy by expanding access to more favourable internal ratings-based methodologies and providing temporary relief to small family savers under new rules for competition between banks.
The UK mortgage market is dominated by a few domestic giants, including Lloyds Banking Group (LLOY.L) , NatWest (NWG.L) and Barclays (BARC.L) , with a smaller group of building societies led by Nationwide.
By the end of 2023, the six largest banks had a combined share of 71.6% of all UK mortgage markets, according to Askume calculations based on Bank of England data.
Costs could be lower
Amid a backdrop of weak economic growth and stable inflation, base rates have fallen and industry insiders predict that some so-called challenger lenders may need to consolidate to survive.
While some smaller banks have made inroads in the current account market, few have made real headway in mortgage lending. Rising compliance, technology and labour costs are putting pressure on returns, giving the strongest brands a justification to merge to gain scale.
M&A activity in the sector has already increased in the past year, with Nationwide acquiring Virgin Money (VMUK.L) and Coventry Building Society combining with Co-op Bank .
But the changes announced Thursday could ease some of the operating pressure on smaller lenders, giving them more opportunities to build market share on their own.
Michelle Adcock, director at KPMG’s Center for Regulatory Insights, said the Bank of England’s new rules could reduce cost-to-income ratios for smaller banks because they may need fewer senior staff to oversee mortgage reporting.
“The intention is not to weaken the capital requirements for smaller banks, but there are certain reporting requirements which are less relevant to them and some of them have been diluted,” he said.
($1 = 0.7664 British pounds)
This is exactly what I needed to know.