Ensuring an efficient, innovative and competitive financial services industry is critical to the future growth and prosperity of the UK economy, especially as we enter a post-Brexit world. A strong mid-tier banking sector is a critical component to ensuring the health of the industry overall.

The last 20 years have seen significant consolidation in the UK retail banking market. Much of this occurred following the global financial crisis, when a number of failing banks were either merged or acquired. By 2018, fifteen of the banks and building societies which existed in 2000 were absorbed into six major groups: LBG, Barclays, RBS, HSBC, Nationwide and Santander.

As a result, the structure of UK retail and commercial banking is relatively concentrated, with a notable absence of mid-tier competitors of scale. The main high street brands (the six major groups) currently hold a total of c.£1.8 trillion of retail assets compared to a mid-tier segment comprising 14 banks and building societies with £360 billion of assets.

Currently there is just one mid-tier institution in the UK with assets over £50 billion. Yet the benefits of having a strong mid-tier are manifold. More healthy mid-tier institutions would enhance the resilience of the banking system and offer a greater chance of new scale players emerging. Mid-tier banks tend to have a strong regional presence and their diverse business models help them serve the financial needs of a wide range of customers. A strong mid-tier also leads to greater competition and consumer choice in current accounts, savings and lending markets.

However, currently there are obstacles to the growth of the mid-tier - in particular, the disproportionate regulatory costs borne by mid-tier banks compared to larger financial institutions. These costs also have a negative impact on investor sentiment, further inhibiting growth.

Take funding for example. A recent FCA study found that ?on demand? funding was quoted as being 85 per cent of total funding in major banks paying an average of 0.28 per cent, but 54 per cent of total funding in building societies paying an average of 0.93 per cent. This is a significant disadvantage. The Bank of England's FLS and TFS schemes provided some funding cost relief to banks of all sizes but ended in 2018. Considering the ending of these schemes, we believe that a review of Bank of England funding access to support the mid-tier and address the material discrepancy in funding costs should be considered and the British Business Bank could direct some of its support to the sector.

On capital, there is recognition from the Bank of England that the current risk weight differentials between the Standardised and the Advanced Internal Ratings Based (IRB) Approach firms are large, create an uneven playing field between different sized banks, and may have incentivised firms under the Standardised Approach to write more, higher LTV mortgages than IRB firms. We are suggesting an industry average SVR should be piloted for mortgage stress testing.

As mid-tier banks grow in size they also face a number of cliff-edge regulatory requirements, which currently are set at various thresholds. These thresholds are set at levels that are low compared to the systemic risk of these institutions, and they impose significant hurdles to growth. The comparison with the US is striking. The Minimum Required Eligible Liabilities (MREL) is applied where assets reach between £15-25 billion in the UK and its equivalent in the US is $250 billion. We think it would be sensible to review these requirements and consider how a more graduated approach could be taken.

Over the years, it has been the diversity of the financial services industry that has been a driver of competition, improvements to customer service and innovation and we also see it as an essential asset to resilience. Specialist banks and new entrants are an important dimension but so is the mid-tier. Indeed, today's specialists will not be able to graduate to the mid-tier unless there is a better calibrated regulatory environment. Now seems a very good time to consider a change.