BOE to ease capital needs of smaller lenders

Bloomberg

Sam Woods, head of the Bank of England’s (BOE) Prudential Regulation Authority, said UK supervisors plan to ease capital demands on smaller banks to make it easier for them to compete against larger lenders.
Writing in the comment pages of the Financial Times, Woods said the authority is adopting a new approach that will help even out disparities that arise because big banks employ internal models for gauging risks that lower capital needs. Smaller banks use so-called standardized approaches which result in higher requirements.
“The PRA will look at capital requirements in the round rather than assuming that a simple ‘sum of the parts’ approach will necessarily deliver the right answer,” Woods wrote in an opinion published on Feb. 26. “This reduces any risk that smaller banks and building societies are disadvantaged by a prudent approach.”
The BOE’s mandate includes ensuring competition in the U.K.’s financial industry, and the agency has authorized 23 new banks since the current regulatory framework came into effect in 2013, he said. Still, the biggest lenders now have market shares that are larger than before the financial crisis, while smaller banks often have too much capital relative to the risks they face, creating an incentive to pursuit riskier mortgages, Woods said.
PRA plans to supplement its current approach, which looks at each separate risk, with an assessment of the total amount of capital that a lender requires. Supervisors of smaller banks will compare the
capital demands generated by the standardized models against benchmarks derived from larger rivals’
internal models, Woods said.
The changes are needed to fix the current system and aren’t a signal that regulators can retreat from demands for stiffer regulatory standards, Woods said. Endangering the benefits of the more stable financial system that has been put in place since the financial crisis, including its ability to support the real economy, would be “misguided,” he said.