Small banks in the UK are unable to provide a wide range of loans to businesses and homeowners at competitive rates due to standardised  regulations of the European Union (EU) and Basel III that have imposed a glass ceiling.

As per the new rules, if banks create internal models utilising their loan databases to measure the riskiness of individual loans, they get rewarded with lower capital requirements. The rules will also hamper new entrants and small banks without loans database.

A research by an independent commission on banking has revealed that small banks in the UK have to hold between three and seven times as much capital against mortgages as their bigger rivals. In addition, they must also hold two to three times as much capital against asset-based loans to small and medium-sized businesses (SMEs) as the big banks.

James Cobb, finance director of Arbuthnot, told the Financial Times: “There is a glass ceiling to our banking. In other industries, small players can cause a major distraction to bigger ones. But it doesn’t happen in banking.”

John Baines, finance director of Aldermore told the Financial Times: “The competitive disadvantage is significant. An incumbent has got, on average, seven years on a new bank coming in.”

The Financial Services Authority is planning to release a paper on regulatory barriers to competition in the coming spring. “We are looking at this issue within the context of a wider review,” said the regulatory.