British financial regulators are proposing easier capital requirements, among other changes, for startup banks in an effort to boost competition in its banking sector.
The UK’s Financial Services Authority (FSA) and the Bank of England published the results of a review Tuesday that examines barriers to new entrants to the banking sector, and proposes significant changes to regulatory requirements and authorization processes that will reduce some of the regulatory barriers to entry.
It proposes a major shift in the approach to prudential regulation of banking start-ups, as the FSA is set to be restructured into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) as of April 1. Both the FCA and PRA will need to approve new entrants, the PRA for prudential issues and the FCA for conduct.
The PRA stresses that its philosophy of regulation is that the possibility of bank failure should be accepted as a normal market process, as long as there are clear mechanisms in place to resolve banks smoothly without threatening financial stability. With that in mind, it’s proposing to allow startup banks an easier path to the market.
Specifically, it says that it will no longer apply additional capital requirements to reflect the uncertainties inherent in start-ups, which has often resulted in capital requirements for start-ups being higher than for existing banks. It would also implement the Basel III regime by applying a minimum core Tier 1 capital requirement of just 4.5% at start-up, versus the 7% to 9.5% requirement, which will apply to major existing banks. It also notes that all new banks will benefit from a recent reduction in liquidity requirements; and there will be no automatic new bank liquidity premium.
Additionally, the review proposes improvements to the existing authorization process. The PRA and FCA pledge to work together to complete all of the assessment and decision making within six months, and say they will introduce a significant level of up-front support to firms during the pre-application stage. They are also streamlining the information requirements in order to help reduce the time taken for authorisation.
“This has been a comprehensive review and we have made some bold changes, ones that respond to the difficulties faced by applicant firms. We believe the changes will make a significant difference to the ease with which new firms can enter the UK banking system and, as a result, enable an increased competitive challenge to existing banks,” said FSA chairman Adair Turner.
The FSA and the Bank of England say they believe that these proposed changes will lead to better outcomes by reducing the cost incurred by firms, easing the capital requirements, and giving them more certainty on the outcome of an application.