Capital requirements37.Metro stated that it was currently required to hold around six to ten times morecapital than the big banks and building societies when securing a mortgagefor a customer, even if it was for the same customer, with the same deposit,on the same property – a situation which did not reflect a level playing field.
38.To elaborate this point, Metro told us that as a new entrant to the market, ithad to use the standardised approach (SA) to credit risk when calculatingcapital requirements, while the larger banks were permitted to use an internalratings based approach (IRB). Metro indicated that the IRB approach wasbased on many years of data, and enabled certain institutions to significantlyreduce the value of their risk-weighted assets.
Note that the IRB is a calculation done by the banks themselves.
40.Metro pointed out to the CMA the difference between the SA and IRB byusing an example ofa low loan- to -value residential mortgage.Metro statedthat such a mortgage carried the same risk profile regardless of the lendinginstitution but the challenger banks risk weight these particular assets at 35%compared with 3 to 6% for the larger banks.
And here's the answer from the regulators
42.In March 2013, the FSA and the BoE announced a shift in approach to theprudential regulation of banking start-ups whereby the additional requirements
(known as ‘add-ons and scalars’) previously applied to reflect theuncertainties inherent in start-ups were no longer to be applied. Theserequirements according to the two regulators often resulted in capital andliquidity requirements for start-ups being higher than for existing banks.43.In a follow-up review, the PRA and FCA referred to the IRB approach tocalculating credit risk versus the SA (the default position) for all new andexisting banks and noted that ‘The PRA has taken steps to addressunderestimation of risks that can result from applying the IRB approach tocertain types of exposures.’ According to this review, the PRA was tocontinue to consider the impact of its policies on competition as required by itscompetitive objective with a caveat that the regulatory capital requirementswere to a large extent determined by the relevant EU legislation over whichPRA had little or no discretion