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Bank of England fears challengers will never de-throne the giant banks
Top officials are encouraging small banks to grow but are worried these new entrants will never displace established giants
The gulf between Britain’s challenger banks and their larger counterparts may be too big to bridge, the head of the country’s banking watchdog has admitted.
Andrew Bailey, chief executive of Prudential Regulation Authority, which is responsible for the regulation of banks and insurers, told MPs on the cross-party Treasury Select Committee that Britain’s biggest banks typically have a balance sheet of more than £500bn each while the next tier, Santander and Nationwide, have up to £200bn each.
In contrast, the largest of the challenger banks have no more than £40bn, and Mr Bailey said he fears this may be too big a gap to close.
“To run a full-scale retail bank, a balance sheet of £30bn to £40bn is quite small,and some of the things I’ve seen in the past is institutions overreaching themselves with balance sheets that don’t necessarily support [their growth],” he said Mr Bailey.
Mark Yallop, the former UK boss of Swiss bank UBS and now an external member of the PRA’s board, said he is sceptical that the small banks can attract enough customers to really take on the big players.
“The issue will probably be how the challenger banks will be able to cover the enormous distance between where they currently are and the scale that they need to really compete with the incumbent banks,” Mr Yallop said.
“And equally important is whether customers show the propensity to switch to the challenger banks as opposed to the overwhelming evidence today which shows that they prefer to stay with the providers they are accustomed to dealing with.”
The Bank of England, Financial Conduct Authority and Treasury have been keen to encourage more banks to enter the market with the aim of giving customers more choice and encouraging incumbent banks to improve their behaviour.
However, growing rapidly has been a challenge.
The introduction of the seven-day current account switching scheme is one other policy designed to promote competition by making it easier for customers to move between banks, taking their payments and direct debits with them.
But the biggest beneficiaries so far have been Santander, Nationwide and Halifax – all large banks and building societies, rather than new players.
The Treasury Select Committee's chairman, Andrew Tyrie, said it is important to look for more ways to improve competition.
“This is a longstanding problem and the switch from the levy to the surcharge hasn’t helped," the senior MP said.
“One way or another, it is important that small challenger banks can be put in a position where they can mount a more effective challenge than we have had hitherto in the UK.”
Mr Bailey added that there could be unpredictable side-effects from regulatory reforms in the banking sector.
He told MPs that the introduction of the ring-fence – a structural reform which splits retail banks away from their investment banking colleagues – could force high street banks to reconsider whether they can continue to offer free-if-in-credit (FIIC) current accounts.
The products are a staple of the banking market and customers are not used to paying for standard bank accounts, but regulators and the MPs on the committee are less keen on the products, arguing the “free” accounts do come with costs but those are hidden from the customer.
“The ring-fencing structure will put pressure on [the FIIC model] to a degree, because one of the things underpinning FIIC banking is the cross-subsidy,” Mr Bailey said, referring to process where cutomers paying fees and charges funds the accounts of those who remain in credit.
“This is not well understood by the public, and we also find the cross-subsidies are not often well understood by the banks themselves. Ring-fencing will do something to force that issue onto the table.”