Mark Sismey-Durrant, Chief Executive Officer at Hampshire Trust Bank
Challenger banks in the UK are currently facing their own challenges in regards to legislation. Designed under a ‘one size fits all’ model, the effect is to create an uneven playing field for the smaller banks when compared to the larger banks they are supposed to be challenging. This means that not only do challengers have to compete harder against the market’s largest players, but they face an uphill struggle in doing so. Here, Mark Sismey-Durrant, Chief Executive Officer at Hampshire Trust Bank, reflects on how much better these banks could do, without such constraints, in serving the needs of their SME customers.
Capital requirements need to be capped
Capital requirements are higher for standardised banks than for internal ratings based banks as they operate on two different models. This means that challenger banks, such as Hampshire Trust Bank, must hold more capital against their loan book than the bigger players do. This makes it harder for challengers to compete in certain areas of lending therefore reducing choice for the consumer or business customer.
On a positive note, the gap between standardised banks and internal ratings banks has been recognised by the regulators. Earlier this year Andrew Bailey, Chief Executive of the Prudential Regulation Authority (PRA), said the regulator is “very focused” on addressing this issue. The PRA is also set to publish its advice for those that want to move from the standardised method to the advanced model later this year – more good news for the challenger banks.
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At the same, we await further clarity from Basel, following the launch of a consultation paper at the end of last year with proposals for new risk-weights for banks using the standardised approach.
However, in order for the smaller players to live up to their name and challenge the ‘Big Four’, we need this situation to be resolved. Implementing a more proportionate and balanced capital model would enable us to provide more support to businesses, helping them to grow and in turn drive the economy forward.
Bank levy blues for challengers
Challenger banks also face the weight of the bank levy. Success, in terms of growing new challenger banks to profitability, will be tempered. It will have a numbing effect.
A bank in our stage of development, seeks to optimise the use of its capital. We want to use our capital to provide products to our customers and increase competition in the banking sector. We believe the bank levy is anti-competitive as it reduces this capital and, over the long term, reduces banking choices available to customers.
The popularity of challenger banks lies in our offering of specialist products and outstanding service. Therefore we feel that the bank levy will be counterproductive in its effect.
We know from our experience that Britain’s hard working businesses need capital to survive, thrive and grow. The emergence of challenger banks not only demonstrates the need for more specialist financial solutions to help drive sustainable lending and economic growth, but also to foster competition and improve choice for customers and small businesses.
Businesses often don’t fit into the lending criteria set by the bigger banks, even if they do they are often slow to respond, meaning firms miss out on valuable opportunities. Specialist challenger banks are the answer as we can be flexible because we have small expert teams who deal personally with every application using their experience to decide which projects to back.
Looking to the future
The financial services sector has huge influence over the fate of the UK economy and will continue to play a vital role as the Government seeks to drive down the deficit. A key component of this will be for the Government to create a level playing field for all banks to ensure we are giving consumers and businesses the best possible options when it comes to their finances.