CYBG has become the first UK challenger bank since the financial crisis to win approval to lower its capital requirements by using new ways to calculate credit risk, a decision which is expected to free up hundreds of millions of pounds in excess capital.
The bank, which owns the Clydesdale and Yorkshire brands and is due to complete a takeover of Virgin Money next week, will now be able to use its own models to calculate risk-weighted assets in its mortgage and business banking books in the same way as the country’s biggest lenders, instead of a generic model that forces smaller banks to have more capital in case of a downturn.
The Glasgow-based company said the new models would have lowered its total risk-weighted assets as of June 30 by around £5.3bn, and lifted its common equity tier one ratio — a key measure of balance sheet strength — by 3.9 percentage points. The bank added that it expected to see further improvements over time as “elements of conservatism in the modelling are no longer required.”
The contrasting risk models have made it more difficult for would-be challengers to compete with the country’s biggest lenders. CYBG said the move, which would take effect from the first quarter of its next financial year, would allow it to “target segments of the lending market where previously it was difficult to compete effectively due to a disparity in capital requirements.”
Alex Medhurst, analyst at Berenberg, said the move “removes a key obstacle to competing effectively with large banks, particularly in the mortgage market”. He added that, while the move to new models was widely expected, the initial impact on the bank’s risk-weighted assets was better than expected.
John Cronin, analyst at Goodbody, said the news “is likely to strengthen confidence that other challenger banks can achieve the designation too” — rivals including Metro Bank, OneSavings and Charter Court Financial Services are currently in the process of seeking approval from the Bank of England.
Mid-sized peers TSB and Virgin already use internal models on some of their loanbooks because TSB was spun out of Lloyds bank, and Virgin inherited its mortgage portfolio from Northern Rock. The Co-Operative Bank won approval for use of the IRB approach in 2008.
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