Proposals to relax rules for small banks in UK a ‘game-changer’ despite US regional banking crisis
Experts were quick to praise proposals to relax rules on smaller domestic banks as the consultation on the so-called ‘strong and simple regime’ came to an end today.
The proposals include simplifying disclosure and liquidity rules for domestically focused banks with less than £15bn in assets..
The rules, the Prudential Regulation Authority (PRA) said, aim to mitigate the ‘complexity problem’ in order to promote competition. The complexity problem is when small banks face higher costs than large banks through interpreting and implementing financial regulations.
Jake Ghanty, partner at Wedlake Bell commented: “This is potentially a game-changer for the City in being able to attract and retain start-up banks, with the offer of a more straightforward Prudential regulatory regime that is proportionate to the risks that these entities present to UK economic stability.”
Similarly Nisha Sanghani, partner at Ashurst Risk Advisory, said the proposals were a “great step” towards enabling a more proportionate approach.
Although supportive of the underlying intentions, KPMG’s UK head of banking Peter Rothwell warned that the reforms would be “highly complex to implement” as the PRA would have to balance “financial stability and promoting competition”.
Rothwell pointed out that because of the threshold at which the reforms apply, medium-sized banks could be stranded. While smaller banks will benefit most from reduced regulatory reporting, mid-size lenders above the threshold would have benefited more from the proposed changes to liquidity rules, he said.
“The PRA should consider how the regulation will avoid firms being stranded in the middle – too large to qualify for simplified rules but too small to effectively challenge incumbents,” Rothwell said.
US regional banking crisis and deposits
The closure of the consultation comes amid instability in the regional banking sector in the US which many have argued derived from relaxing regulations on smaller banks. Some have suggested that the crisis would make the PRA less likely to relax rules on smaller banks in the UK.
Sanghani said it is crucial that the regulator does not “inadvertently” create another problem in its attempts to solve the complexity problem.
“When things go wrong smaller banks can also pose a significant consumer and market impact. It is clear that the simpler regime will need to ensure that focus on resilience is not lost,” Sanghani said.
But Mazars’ Anindya Ghosh Chowdhury suggested that the reforms would not have a major impact on financial stability. “What looks like ‘deregulation’ is perhaps not what it says on the tin,” he commented.
Ghosh Chowdhury noted that an exemption which would allow banks to stop calculating their net stable funding ratio – which tries to incentivise banks to have a more stable funding base – only applies to banks which get a majority of their funding from retail deposits, which are traditionally more stable anyway.
He also pointed out that relaxations in liquidity coverage requirements apply to a “tiny fraction” of smaller banks.
“What looks like deregulation is essentially a drive to remove redundant requirements, which should ease the regulatory burden on smaller firms without taking away the benefits of post-crisis reforms,” he concluded.
But Rothwell noted that the crisis in regional banks has demonstrated that retail funding can also pose “significant risks”.
He suggested that the emphasis on retail deposits needs to be complemented with other measures such as the level of uninsured deposits or deposit concentration.