What price a banking license?

Around 50 million pounds

JC Flowers, the Private Equity house based in New York, has agreed to pay GBP50m for a 49% stake in a Joint Venture with Kent Reliance Building Society (KRBS).

Does JC Flowers see KRBS as a major business opportunity? Hardly, because KRBS has only one branch and 45 employees. So it is definitely not in the multi-billion dollar league in which JC Flowers normally plays.

No, JC Flowers has done this deal for one reason only – to get cheap, fast access to a banking license. Whilst the “Grumpy Old Men” (Peston’s name for the group of banking industry veterans who have clubbed together to form a company to buy bank branches which the big4 are being forced to sell) are applying for a license from scratch (although with special dispensation from the UK Financial Services Authority which allows the group to bid for banking assets at the same time – so the outcome of the license application is pretty clear), JC Flowers has bypassed this.

A UK banking license is a valuable commodity. Under EU legislation, banks are now able to “passport” the licenses throughout the EU, obviating the need to apply for a license in each member state. So the moment the JC Flowers / KRBS deal is closed, JC Flowers is able to use this vehicle to provide banking services throughout the EU.

Should banking licenses be available in this manner? Or should there be a requirement that any significant change in shareholders or executive officers triggers a review of the license, and possibly a requirement to repeat (a subset of) the application process, forcing would-be bidders to think very carefully?

For sure the banking regulator can revoke a license, but this is a very serious and very public course of action, and exposes the regulator to unwanted public scrutiny of its approach. Refusing to grant a license initially, or postponing this until further requirements are fulfilled, is much easier.

Here at Vox Sapiens, we have concerns that there is a route to bypass the hoops that must be jumped through to obtain a banking license, thereby increasing the risk of problems in the banking industry. And we know what havoc these can cause.

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