MMR: Non-bank lenders face tougher capital requirements
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The Financial Services Authority has revealed in its consultation paper today that It believes there is a case for introducing a more risk-based prudential framework for non-bank lenders which makes them hold more capital the riskier their products.
It’s current thinking is that an appropriate prudential regime for non-banks could consist of :
- More risk-based capital requirements, incorporating:
- a securitisation requirement;
- a standardised credit risk requirement;
- an operational risk requirement; and
- an other assets requirement
- Restrictions on the quality of eligible capital; and
- A tailored liquidity requirement.
It also thinks it may be appropriate for non-banks to be subject to the standardised approach to credit risk for their on-balance sheet mortgage assets.
By way of example, for loans up to an 80% LTV this would give a risk weight of 35%, and therefore a capital requirement of 2.8%.
It says: “Our current view is that a case can be made in favour of our imposing enhanced capital requirements directly on non-banks. Increasing capital requirements and fitting those more closely to the lending risks run by non-banks may contribute to addressing concerns around the procyclical effects that non-banks can have and the degree of lending risk they run.”
It believes increased capital requirements could potentially constrain the level of non-bank lending.
It says it may be appropriate for non-banks to have some equity backing, but at a lower level than is required for banks.
It adds that there is clear evidence of greater volatility in lending provided by entities not directly funded by deposits.
It believes in the UK non-banks have tended to use the “originate to distribute” model. Since this removes lenders’ exposure to the credit risk this encouraged them to “weaken their lending standards”.
The FSA plans to consult on any proposed changes to non-deposit taking lenders later in the year.
