2013-02-28 – London
New Banks to have lower capital requirements than existing banks
Although the Basel Committee on Banking Supervision has in theory focused predominantly on making banks safer, in practice this has brought about a lack of competition in UK banking. Larger banks have been favoured as more experienced, capable and diversified corporations and as a result have been rewarded with lower capital requirements compared to smaller banks.
With new plans announced today however, new banks will be allowed to operate with a capital requirement far lower than that of established banks. Core capital requirements could be reduced down to as low as 4.5% of risk-adjusted assets.
This is a brand new way of thinking for UK regulators because previously new banks have been branded as risky enterprises with very high capital requirements. They had to hold more capital than large banks to reduce the chances of failure. These new rules therefore represent a complete rethink on how banks should be governed. A bank failure should no longer be viewed as regulatory failure.
Key to these fresh ideas will be how a new bank prepares for the possibility of failure. With sufficient pragmatism in delivering quick repayments of insured deposits, a bank failure can be a smooth process. Banks are to be made to write living wills, meaning a plan is already in place to ensure a smooth undoing of a failing bank.
Regulations, set by the Prudential Regulation Authority – the entity which takes over from the FSA in April this year – could give new banks about three years before their capital requirements have to be in line with other established banks at 7%. As an incentive to increase their capital reserves quickly, management may not be allowed to pay bonuses or dividends until their core capital meets this rate.
Our opinion is that these lower capital requirements should also be extended to small banks that do not pose a systemic risk, as they are not ‘too big to fail’.
