Lending to small businesses could drop by 25%, if proposed changes to UK bank capital rules are pushed through.
In December 2022, the Bank of England’s Prudential Regulation Authority (PRA) announced plans to introduce the final tranche of Basel Banking Regulations in the UK.
Within the proposed changes, the ‘SME supporting factor’ – a policy introduced in 2014 across the EU, guaranteeing favourable treatment for SME loans – is likely to be removed.
Instead, financial regulators have called for a more “risk-based” approach to SME lending.
Curiously, a quirk of the potential policy change would make lending secured with a property (as part of the borrower’s personal guarantee), more expensive than some unsecured loans, due to high capital charges on property-backed loans.
Implications of Proposed Bank Capital Rules on SME Lending
A recent report reveals that changes to bank capital requirements could lead to a substantial drop in lending to UK SMEs, to the tune of £44bn.
Discussing the findings with the Financial Times, the report’s author Oxera Consulting commented: “SME finance is important for the general health of the UK economy, with SMEs having been described as an ‘engine of growth’ for the UK.
“Given the broader economic outlook in the UK, and the extent to which SMEs rely on bank finance, this does not seem to be a good time to take risks with eliminating the SME support factor.”
Dwindling financial support from the banking sector for SMEs has been a consistent feature of recent years.
Small businesses will be hoping that non-bank lenders will continue to pick up the slack and increase their funding of UK SMEs.
Speaking to the Bank of England’s proposals, Chairperson of the Federation of Small Businesses, Martin McTague warns “that lending to the SME sector may become even more expensive, leading to a reduction in the provision of credit and higher interest rates”.
Continuing, McTague remarked that: “if the SME sector finds it more difficult to access credit and must pay higher interest rates for borrowing, it is likely that this will compromise the ability of SMEs to scale up and create jobs”.
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