Justin Duffy, Consulting Director, writes on management and strategy
Recent calls by the chiefs of several of the smaller ‘challenger‘ banks in the UK, to change the regulatory regime in their favour are understandable. Banking has some of the highest barriers to entry of any industry, and few would dispute that new participants could be beneficial. But the Chancellor’s apparent rebuff has rekindled the debate about how this can best be achieved
In the UK, neither all companies, nor all individuals are taxed at the same rate – there are many variables, designed to strike the best balance between the needs of an individual person or entity, the public finances, and the wider economy. The bank levy from which the challengers wish to be exempt stands out for its blunt-edged, ‘one size fits all’ approach, in an industry which is no less diverse, and no more suited to this than any other.
However, this argument should not come down to a tussle between the interests of the challenger banks or the Big Five. The real discussion should be about whether the banking industry meets the needs of its customers. Since the government still sees the need to guarantee lending to both consumers and businesses, we must draw the conclusion that it does not.
Some have suggested that doing away with big banks entirely would allow competition and innovation to thrive, but this is misguided. ‘Too big to fail’ is a good phrase to scare the uninformed, but experience suggests the opposite is no better. The failures of many poorly-run local lenders during the Spanish property collapse proved to pose no less of a systemic risk than the collapse of a large bank would have done.
Size is not the answer, but innovation must be part of it, and without fair competition it is hard for innovation to flourish. Fairness can be subjective, but there is no doubt that large banks do have greater ability to argue their case with regulators. For example, in the absence of an imminent change to taxation, the challengers are now calling for the Chancellor to ‘level the playing field’ by reducing their capital requirements. While conventional risk modelling may be harder for the challengers, as they have less historical data, that should not be the end of the argument.
It is self-evident that more data is not necessarily more informative. High quality analysis of a smaller data set is potentially more informative than poor analysis of a large data set. There may be an opportunity for challenger banks to look again at how they model different scenarios of risk and opportunity in their businesses, and how they present that analysis to regulators. A more innovative approach to the integration of market, financial and customer information could allow the challengers to set out their stall in a more persuasive manner, as well as to gain better understanding of their potential routes to growth.