Proposals to allow new banks to challenge established high street players will be announced this week, as the Bank of England prepares to announce the size of any capital shortfalls at the major lenders.
The Bank's financial policy committee (FPC) estimated in November that banks could have a £60bn hole in their capital if they made more objective assessments of the losses they faced. The FPC's pronouncement on the actual size of the shortfall are expected on Wednesday, shortly after the Financial Services Authority (FSA) sets out proposals to enable new banks to be set up more easily by allowing them to hold less capital than high street institutions.
The creation of new banks to challenge the "big four" of RBS, Lloyds Banking Group, HSBC and Barclays, is a key plank of the government's policy of injecting competition into the sector and cut the cost of banking. In the last week of its existence before it is broken up, the FSA is expected to say that new banks will need half as much capital as existing ones while they are setting up.
Last week Martin Wheatley, the head of the new Financial Conduct Authority (FCA), which formally takes over part of the FSA's work next week, said that bank customers put up with worse treatment than in other industries, but that people are more likely to divorce than move their accounts. The FCA is being given a new mandate to oversee competition and is in the process of recruiting a new director to take control of this crucial part of its new remit.
Existing banks, however, are more focused on the assessments that have been made of their capital positions. The concerns are focused on three main areas: the way that banks are offering leniency to customers in arrears (forbearance); the impact of more regulatory fines and compensation from mis-selling scandals; and the way international capital rules allow them to set aside asset capital against the risk of the loans they hold.
The Bank of England has put an estimate on the three areas of up to £15bn, £10bn and £35bn respectively – a total of £60bn – although at the lowest end the estimate is closer to £25bn.
A survey by accountancy firm KMPG has underlined the impact on bank profitability last year of regulatory scandals - including the fixing of the Libor interest rate and the mis-selling of payment protection insurance. According to the report, combined pre-tax statutory profits at the big four and Standard Chartered slumped 40% on the previous year to £11.7bn.
The government has made clear that it will not put any more money into the banking sector on top of the £65bn pumped in to RBS and Lloyds. Tensions have also emerged, however, about the structure of RBS after the outgoing governor of the Bank of England, Sir Mervyn King, suggested it be broken up into a good and bad bank. Banks can fill any shortfalls not just by raising capital but by cutting risks and selling off businesses.
The FPC is key part of the new regulatory regime which begins next week. It has been set up to look for pressures in the financial system while the Prudential Regulation Authority is being set up by the Bank of England to take on banking regulation previously conducted by the FSA.
