TSB has its IPO today. Many will suggest that it marks another milestone in the resurgence of regional banking but a little noticed fact in the debate on regional banks is that many of them collapsed in 2008, even some of the much-admired German ones had problems to resolve. That sort of experience makes a regulator very nervous and as a consequence it has been imposing much higher capital requirements on the smaller banks ever since.
Take the Coop bank for example. It had to do a liability management exercise that netted it £688 million to begin to cover a hole that the regulator had discovered in its balance sheet. The regulator has made some noises about letting challenger banks have lower levels of capital, but the reality shows they don’t believe it in practice. Coventry Building Society is having to raise Contingent Capital because, while its capital base looks pretty strong versus the large banks – it has a fully-loaded leverage ratio of 3.0% – those metrics don’t count for the regulator, they need to hold a whole lot more. Nationwide Building Society was forced to do the same last year. TSB, when it is sold into the market, will have a leverage ratio of 5.6%. That is almost double the leverage ratio of the large banks.
This could go two ways: either regional banks will have to prosper with these higher capital requirements; or they will expand – de-regionalise, if you like – in order to enter the level playing field with their bigger colleagues. If TSB proves to be a very popular IPO, it may be that investors are spying the likelihood of the latter. What they may see in the well-capitalised TSB is the acquisition vehicle for buying up other small banks, let’s say the Coop Bank, Virgin Bank and Williams and Glyn. The bigger they are, the less capital the regulator feels they need, so it makes a lot of sense for them all to merge. Politicians might be talking about regional banking but the regulatory approach might push the market in the opposite direction, forming a new big bank from the little ones.
If that starts to happen, how will Labour respond? We haven’t heard much from them on regional banking in recent weeks and going up against the prudent approach of the regulator is fraught with risk. In the meantime, the Government is creating its own business bank and that venture will be under political pressure to operate effectively at the regional level. Yes, there may be a market failure in regional banking that a Government-backed business bank has to fix, or it may be that the market is being driven in a particular direction, away from regional banking, by the regulator. Is a market failure still a market failure if it’s there on purpose?