Metro Bank calls for looser rules on small banks to aid UK recovery

Metro Bank’s chief executive has urged regulators to take advantage of a “unique moment” to boost competition by loosening rules for small banks, warning that the sector’s current weakness will hamper the UK’s recovery from the coronavirus crisis.

“If we really want the economy to boom then we’re going to have to figure out a way to create more competition in banking,” Daniel Frumkin told the Financial Times.

He said bankers needed to do a better job of arguing that reform would help the wider economy by improving credit availability and reducing the “loyalty penalty” faced by customers who rarely switch providers.

“This is an issue that affects everyone, and it’s more pressing at the moment as we’re on the precipice of what I hope will be a huge [small business] boom that will help the economy bounce back better — so not fixing the roadblocks to a more competitive landscape has a clear economic impact,” Frumkin said.

A report published on Monday by the Social Market Foundation, a cross-party think-tank, said the market for personal current accounts was more concentrated than before the 2008 financial crisis, and warned that the pandemic had exacerbated some of the issues because it had led to a decline in switching rates.

Challenger banks’ share of lending to small businesses also fell from 48 per cent to 31 per cent last year, as the government mainly relied on big banks to help design and implement its emergency loan schemes.

Richard Davies, chief executive of business-focused challenger bank Allica, said the pandemic threatened to reverse some of the gains made over the previous decade. “Post-Covid and post-Brexit, this has to be the year to make progress but I’m not convinced it’s got enough senior government attention right now,” he added.

Executives across the UK banking sector have been stepping up their public and private lobbying efforts in recent months ahead of a series of key regulatory reviews.

The Bank of England’s Prudential Regulation Authority is reviewing its approach to “minimum requirements for own funds and eligible liabilities”, or MREL, which force banks to issue expensive loss-absorbing debt when they reach a certain size.

In the UK, the requirement kicks in much earlier than equivalent rules in the EU and US, which bankers say creates a serious barrier to growth and discourages investment. The PRA is also discussing broader changes to “simplify” rules for non-systemic lenders in the wake of Brexit.

Meanwhile, an independent board led by former Standard Life Aberdeen chief Keith Skeoch is reviewing “ringfencing” rules that were designed to improve stability at the largest banks but have hit profitability at smaller lenders. A cross-party group of MPs is also running an inquiry into post-Brexit regulatory reform with a focus on challenger banks.

Frumkin has eschewed the limelight since taking charge of Metro Bank last year, unlike the bank’s former leadership team, which was forced out after a misreporting scandal in 2019. However, he said he had chosen to “put my head above the parapet” because of the rare window of opportunity for changes.

“If the [BoE] comes to a conclusion that isn’t helpful for competition that’s probably the answer for a number of years . . . It will be another five to 10 years before they revisit.”