Proposals to allow new banks to challenge established high street players will be announced this week, as the Bank of England prepares to announce the size of capital shortfalls at the major lenders.
The central bank’s Financial Policy Committee (FPC) estimated in November last year that banks could have a ￡60 billion (US$91.49 billion) hole in their capital if they made more objective assessments of the losses they faced. The FPC’s pronouncement on the size of the shortfall are expected tomorrow, shortly after the Financial Services Authority (FSA) sets out proposals to enable new banks to be set up more easily by allowing them to hold less capital than high street institutions.
The creation of new banks to challenge the “big four” of Royal Bank of Scotland, Lloyds Banking Group, HSBC and Barclays, is a key plank of the government’s policy of injecting competition into the sector and cutting the cost of banking.
In the last week of its existence before it is broken up, the FSA is expected to say that new banks will need half as much capital as existing ones while they are setting up.
Last week, Martin Wheatley, the chief executive officer designate of the new Financial Conduct Authority (FCA), which formally takes over part of the FSA’s work next week, said that bank customers put up with worse treatment than in other industries.
The FCA is being given a mandate to oversee competition and is in the process of recruiting a director to take control of this crucial part of its remit.
However, existing banks are more focused on the assessments that have been made of their capital positions. The concerns are focused on three main areas: the way that banks are offering leniency to customers in arrears (forbearance); the impact of more regulatory fines and compensation from mis-selling scandals; and the way international capital rules allow them to set aside asset capital against the risk of the loans they hold.
The Bank of England has put an estimate on the three areas of up to ￡15 billion, ￡10 billion and ￡35 billion respectively — a total of ￡60 billion.
A survey by accountancy firm KMPG has underlined the impact on bank profitability last year of regulatory scandals — including the fixing of the Libor interest rate and the mis-selling of payment protection insurance.
According to the report, combined pre-tax statutory profits at the big four and Standard Chartered slumped 40 percent on the previous year to ￡11.7 billion.