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FSA Final Proposal to Gamble on Low Capital for New Banks

March 25, 2013

The U.K.’s Financial Services Authority plans to cut in half both the time it takes startup banks to get approval and the amount of capital they must hold, in a proposal due today.

The Prudential Regulation Authority, which takes over bank supervision from the FSA next week, will let new lenders operate with a capital ratio as low as 4.5 percent, the minimum allowed under global standards, in an effort to revive banking competition. The measures, the last from the FSA, will also include a plan to cut the time new banks have to wait for approval from one year to as little as six months, a person familiar with the plans said.

“We support the idea that banks have to be safe and there has to be a rigorous process to make sure banks aren’t going to fail,” Paul Stephenson, a spokesman for the British Bankers’ Association, said by telephone. “We hope that in the new consultation there will be concrete action which says how the FSA can speed up the bureaucratic process.”

Britain’s four biggest banks -- Barclays Plc (BARC), Lloyds Banking Group Plc (LLOY), HSBC Holdings Plc (HSBA) and Royal Bank of Scotland Group Plc -- account for almost three-quarters of the market for checking accounts, according to the Office of Fair Trading, and new entrants, such as Metro Bank Plc, have struggled to make inroads into the mortgage market. Chancellor of the Exchequer George Osborne has pledged the government would make it quicker and easier for new players to get approval.

Disadvantaged Banks

“We’ve tended to have capital and liquidity add-ons for new-entrant banks so they’ve been disadvantaged,” Adair Turner, chairman of the FSA, told U.K. lawmakers in London last month. “We are shifting that, to where a new entrant bank will be able to run on the minimum legal requirement” under rules set by the Basel Committee on Banking Supervision.

The measures -- known as Basel III and scheduled to be fully implemented globally by 2019 -- will set the minimum core capital for banks at 4.5 percent of their assets, weighted for risk. So-called systemically important banks must maintain capital ratios of between 8.5 percent and 10 percent under the Basel rules.

The FSA will be disbanded on April 1 and be replaced by the PRA and the Financial Conduct Authority, which will oversee markets and prosecute financial crime. The FCA also has a mandate to improve competition in the banking industry.

Turner has said new lenders would have to hit the 7 percent capital mark before being permitted to pay dividends.

He warned that politicians must be prepared to let banks fail as a result of the lower barriers to entry.

‘Actual Failure’

“This is a significant difference and reflects a PRA philosophy that the actual failure of a bank, provided it happens in a smooth fashion and with rapid pay out of insured depositors, is not necessarily a regulatory failure,” Turner told lawmakers. “It’s very important for parliament to accept that. If you remove barriers to entry you’ve got to have entry and exit, as they do in the U.S.”

Banks that have acceptable payment systems, anti-money- laundering controls and staff can expect their waiting time for regulatory approval to be cut to about six months, said the person familiar with the plans, who declined to be named because they aren’t public yet.

While the government and regulator may want to make it easier to set up a bank, actually attracting new entrants may be difficult if recent deals are a guide, said Ian Gordon, a banking analyst at Investec Plc (INVP) in London. Both Lloyds and RBS have struggled to find buyers for the branches they’ve been ordered to sell to boost competition.

RBS is still trying to find a buyer for its Williams & Glyn’s branches, while customer-owned Co-Operative Bank Plc is, after eight months, still struggling to complete its purchase of Lloyds’s branches.

“The most credible new entrant in banking is potentially going to bail,” Gordon said.

To contact the reporter on this story: Ben Moshinsky in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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