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The Conservative chair of the House of Commons Treasury select committee has questioned why proposals to revamp UK bank capital rules include measures that would hit lending to small businesses.
The intervention by Harriett Baldwin came after the Financial Times reported that the controversial plans — part of a broader proposal by the Bank of England’s Prudential Regulation Authority to introduce the final package of Basel rules in the UK — risked cutting lending to SMEs by 25 per cent.
The small print of the package includes removing a favourable treatment for SME loans, known as the “SME supporting factor”, that was introduced across the EU in 2014, when the UK was still a member of the bloc, in favour of what regulators call a more “risk-based” approach.
“What would be difficult is if we use Brexit freedoms to do something that no one else is doing by tightening lending criteria for SMEs,” Baldwin said, adding that it was too early to know precisely what the PRA would end up doing. The regulator is running a consultation that closes next month.
She said the committee has written to business groups — including the CBI, Federation of Small Businesses and British Chambers of Commerce — to get their feedback on the proposals.
Oxera, the consultants, have estimated that the changes could result in a £44bn drop in lending to small businesses. Banks’ total lending to SMEs, excluding the government’s coronavirus pandemic-inspired bounceback loan scheme, is about £165bn.
Alex Veitch, director of policy at the BCC, said: “Limiting risk to the UK economy makes sense but the danger does not sit in the thriving banking sector for smaller firms.”
He added: “It would be a mistake to remove the SME supporting factor as it will have a very real impact on those businesses which will then find it more difficult to access finance.”
Kitty Ussher, chief economist at the Institute of Directors, said she would raise similar concerns in her submission to the PRA’s consultation.
However, another business leader said there might be less sympathy with relaxing the proposed rules around bank capital given the latest crisis in the financial services sector.
Sam Woods, head of the PRA, told the Treasury select committee earlier this month that he was waiting for feedback on the issue of the impact on SMEs and would keep an open mind about the situation.
“It is worth mentioning that the main point of the reforms is to make sure we are capturing risk correctly. The reason to do that is, if you do not, that chicken comes home to roost when you have a downturn, and that is precisely when you want lending to be available,” he said.
The BoE proposals also include an element that would make lending backed by property to small companies more expensive than an unsecured loan — because the capital charges on property-backed loans are high.
The PRA declined to comment.
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