Tarun Mistry and Paul Garbutt outline the requirements of the Prudential Regulatory Authority.
One frequently discussed outcome of the financial crisis has been a general reduction in the size of bank balance sheets, a process that’s still under way.
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For those in the asset financing and consumer finance industries this often means the banks that traditionally lent to them have withdrawn facilities or renewed funding lines only at higher interest rates. This applies to loans both directly to consumers and companies financing their own assets, as well as to financing companies offering such financing options to their own customers. A change in the traditional asset financing market is under way with new players yet to fill all the gaps left by the traditional banks.
One route many asset financing firms are considering is to become banks themselves and get their funding from retail deposits.
Earlier this year, the UK’s Prudential Regulatory Authority (PRA) published a new policy on the authorisation of new banks.
The new regime is intended to make it easier for new firms to gain banking licences and encourage competition in the banking sector. The PRA’s process aims to:
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By GlobalData– Reduce the capital and liquidity requirements for new entrants (compared with the previous regime);
– Put new entrants on an equal footing with more established banks;
– Reduce the overall timescale for gaining a banking licence (applicants should anticipate a typical 12-month process versus the previous 18 to 24 months);
– Create a more "user friendly" approach to the administration of the authorisation process, reducing the risk for investors in new banks and providing greater clarity to applicants on PRA’s detailed requirements.
Due to a combination of this new regime and current market dynamics for funding, anecdotal evidence points to a record number of domestic and overseas institutions applying for banking licences.
One group clearly within these new applicants is existing asset and consumer financing companies. Many such organisations find a practical and more economic alternative to traditional bank funding is to go direct to the retail deposit market for cheaper funding. This retail deposit base can be accessed through a banking licence with much of the administration being outsourced.
The cost of retail deposit funding is usually more than 3 to 4% less than taking funds from traditional banks. Anecdotal evidence suggests this route can be more attractive than traditional bank financing where the firm’s balance sheet is anywhere in excess of £100 to 300m (€120 to 360m).
There are many potential pitfalls to navigate and moving into a bank regulatory regime should be approached carefully.
The financial regulators’ handbook applying to banks runs to several thousand pages and companies considering applying for a banking licence need to show they have senior managers familiar with the rules and that they are compliant. The compliance costs are significant and the recent publicity around Co-operative Banking Group means regulators will put even more emphasis on the individuals running a licensed bank.
There are also proposals to pass new laws making directors and senior management in banks more personally liable should the bank fail. Yet, the logic for many companies of being able to be more certain about their funding source and potentially reduce their costs of funding is overwhelming and this trend for new, smaller banks entering the market looks set to continue.
Tarun Mistry and Paul Garbutt are partners with Grant Thornton
