The PRA revealed that it plans to refine its Pillar 2A capital framework, reducing the disparity in capital requirements between the standardised approach – mainly used by smaller banks – and the internal ratings based approach.

The changes will aim to ensure the PRA’s capital requirements are not overly prudent for smaller firms who are facilitating effective competition.

The proposals should also boost the safety and soundness of banks by reducing incentives for standardised approach lenders to specialise in higher loan-to-value mortgages.

“This consultation is a major step forward for the PRA in facilitating effective competition, reducing capital requirements for eligible small firms,” said Sam Woods, deputy governor for prudential regulation.

“This will be good for competition and for safety and soundness.”

Commenting on the PRA’s announcement, Jon Hall, managing director of Masthaven, felt this was a start towards equalising the competitive position of new banks in the mortgage market.

“The mechanical application of the standardised approach will continue to deliver a significant disparity in capital requirements.

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“However, as a bank which firmly believes in the fact that one size does not fit all, Masthaven welcomes the approach proposed by the Bank of England to apply discretion based on a risk-based approach.”

Rishi Khosla, co-founder and CEO of OakNorth Bank, also felt that the PRA’s announcement was an important step towards levelling the playing field.

“Large banks pose a systemic risk to the UK economy, small banks do not, so we should not have to adhere to more onerous capital requirements.

“…It is essential that [the PRA announcement] is not limited to mortgage products, but that it [is] applied to business and property development loans too, especially given the ongoing shortage in housing supply.”

Rishi revealed that for every loan it grants, it had to set aside several times more capital than the big five banks, which greatly impacted how much it could lend and when.

“By being able to apply our own model regarding risk weighting – instead of having to use the standardised approach – we would have a larger amount of capital at our disposal, which would ultimately mean more money that we can lend.

“This would be good news for competition and good news for borrowers.”