Impact of challenger banks starts to recede

Lending by challenger banks grew just three percent during 2019, a vast drop on a growth rate of 19 percent in 2018, according to a report by the accountancy and business advisory firm BDO.

Last year also saw the slowest annual growth rate since 2012, when challenger banks originated a total of £41bn in loans.

A wave of challenger banks emerged after the credit crunch to fill the gap left by high street banks and play an important role in lending to SME, with lending to customers more than doubling in the last five years.

This slowdown comes after a warning issued to challenger banks by the Bank of England last year. In mid-2019, a senior regulator at the Bank of England wrote to the CEOs telling them that their lending policy was “overly optimistic” following a stress test conducted by the central bank.

The optimism, according to the letter, was symptomatic of the “relatively benign credit conditions” that has existed since many of these banks’ inception.

The stress testing, which reviewed 20 fast-growing, new UK banks, found that the challengers were “underestimating potential losses”, should there be an economic downturn, and a tightening of standards was recommended.

Leigh Treacy, head of financial services advisory at BDO, said: “Brexit uncertainty and the economic slowdown seems to be causing some of these banks to temporarily slow down their lending growth.”

Treacy added: “Considering the huge challenges and costs of setting up a bank from scratch, challenger banks have done a great job and have delivered lending to borrowers who were hit hard by the credit crunch.”