Smaller UK banks want post-Brexit easing in capital rules

Lenders expect Britain to tailor financial rules for smaller banks to encourage competition

Leaving the European Union could allow Britain to tailor financial rules for smaller banks to encourage competition to serve households and small businesses, a senior UK lawmaker said on Wednesday.

Andrew Tyrie, chairman of parliament's Treasury Select Committee, said EU rules could be placing smaller banks at a disadvantage with their "one size fits all" approach to capital and other requirements.

"The Bank of England and the government both now need to consider whether the opportunity afforded by Brexit could enable the development of a regulatory regime less prejudicial to small and challenger banks," Tyrie said in a statement.

A group of smaller lenders, including Metro, Aldermore and Charter Savings Bank, wrote to Tyrie after Britain voted last month to leave the EU.

The bulk of rules UK banks must comply with, such as how much capital to hold, were approved at the EU level.

The government wants more competition in banking, a sector where a handful of big lenders like HSBC, Barclays, Lloyds, RBS and Santander control about 80 percent of high street accounts.

The group of smaller banks said Britain's competition review of high street banking failed to tackle the root causes of poor competition, such as the "asphyxiation effect" created by capital requirements and taxation.

"Without a far reaching holistic approach, smaller banks will remain restricted to a narrow part of the market which is underserved by the larger banks," the group said.

"For the avoidance of doubt, we seek neither favours not any special treatment. All we ask for is a level competitive playing field."

Tyrie also published a letter dated February 26 from Andrew Bailey, who then headed the BoE's banking supervision arm but now heads the Financial Conduct Authority.

Britain, jointly with Germany, appealed to the EU in January for a more "proportionate" approach to capital requirements for smaller lenders, and the bloc's executive European Commission is reviewing this.

Bailey's successor, Sam Woods, told the Treasury Select Committee on Tuesday he would keep the issue of challenger banks high on his agenda.

Tinkering with bank capital rules could be tricky without parallel EU changes, however.

Britain is expected to seek continued access to the bloc's single market for financial services after it leaves the bloc, but success may hinge on agreeing that its lenders apply rules similar to those in the EU.