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KPMG: Regulation threat to challenger bank growth

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Challenger banks’ growth could be hamstrung by disproportionate regulatory pressure, according to a new KPMG report.

The report, written by Warren Mead, says regulation tends to favour larger banks over smaller challengers.

It says: “A potential inhibitor to challenger growth is a regulatory regime that in some respects tends to favour incumbent banks over the emerging challengers.

“This is particularly true with regard to the regulatory capital regime. In theory the rules apply equally to all banks, in praxis however, they don’t.

“Challengers have to hold more capital in comparison to the big banks. The reason for this is perceived risk. By definition, a challenger is new to the market and consequently lacks the trading record and evidential data that an incumbent can offer the regulator.”

This leads to challenger banks being seen as being branded with a higher risk rating and a larger capital requirement as a result, according to KPMG.

For challengers to thrive in the mass market, regulation must change, says KPMG.

It says: “To attain the ‘advanced’ model rather than ‘standard’ designation requires access to data that few challengers have, as well as a huge commitment of time and money.

“That doesn’t mean they are riskier propositions. In fact, given their focus and simpler business models they may well be less risky.

“However, when the regulator applies the same tests across the board the new generation of institutions are placed at a disadvantage.”

KPMG says one solution is to apply the same regulatory standards to all banks but to allow challengers to give an average of the weightings that are applied to the major institutions.


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