New lending rules for banks: what's really at stake is choice for borrowers

Forget banks' "competitive disadvantages".

“Give us a chance, mate”, seems to sum up the reaction from new banks, to a report by the Independent Commission on Banking which claims they must hold up to seven times as much capital against mortgage loans as their high street rivals.

The regulation behind this state of affairs, specifically the offering of lower capital requirements to those banks able to use their own databases to model risk on individual loans, is being criticised because only the biggest banks have the critical mass to earn the rewards.

Of course, the rationale that capital requirements wouldn’t be lowered unless regulators felt the database resources of those favoured were of sufficient scale to mitigate the risk of doing so sounds a bit dull in its affirmation that bigger, in some cases, really is better in banking.

More stirring, surely, to condemn the rules as stifling to the range of borrowing options available to consumers and small businesses at a competitive rate. Hence comments in the FT about a “glass ceiling” from Arbuthnot-owned Secure Trust Bank and “competitive disadvantage” from new bank Aldermore.

Once again, it’s the unstoppable force of “SMEs must be fed” smashing into the immovable object of “banks must be risk-averse”; a ringing collision that has underscored four years of regulatory discussion like a tireless blacksmith bashing away at the back of a press conference.

What’s at stake in this particular iteration of the discussion is the range of mortgage options borrowers have access to. Regulatory impact on this range is definitely not great for the competitive landscape, and certainly frustrating to smaller banks, but it’s by no means hobbling. Aldermore, for example, is well known for having grown at a blistering rate since its inception in 2009, and has had little difficulty picking up all the new business it has had an appetite for.

It’s more troubling, perhaps, to remember how the same issue of capital requirements can prove fatal to the big league.

“Increased regulatory requirements coupled with additional fiscal charges, the on-going economic malaise and other negative ‘head-winds’ require a serious response”, read an explanation sent to me by the press office of Netherlands-based banking group ING at the end of October last year.

What the statement was casually explaining was the decision by the group – based on pressure on its capital base caused by obligations both to Basel III regulation and the Dutch government – to kick a £1.5bn hole in the UK asset finance market by putting subsidiary ING Lease UK into run-off mode.

ING Lease was hugely profitable, and provided a lifeline for thousands of small businesses in need of equipment finance – but it didn’t matter. It was just too much of a drain on what was available.

Looking at the asset finance market now (where Aldermore is, out of interest, one of the banks racing to fill the gigantic gap left by ING), it’s clear to see how the demands of regulation really can have a brutal impact on the choices available to borrowers. 

Photograph: Getty Images

By day, Fred Crawley is editor of Credit Today and Insolvency Today. By night, he reviews graphic novels for the New Statesman.

Photo: Getty
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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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