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BoE overhauls bank capital requirements, plans to risk £44bn in SME lending

plan to renewal UK bank capital controls could cut lending to small businesses by 25%, threatening jobs and economic growth, new research warns.

The Bank of England’s prudential regulator has announced controversial plans to overhaul the capitalization of small business loans in December as part of a broader proposal to introduce the final package of Basel rules in the UK. bottom.

A small part of the package includes the removal of a small business loan incentive known as the “small business support factor.” This was introduced across the EU in 2014, when the UK was still a member of the bloc, in favor of what regulators call. A more “risk-based” approach.

The BoE’s proposal also contains the peculiarity that real estate secured loans are more expensive than unsecured loans due to the very high capital burden of real estate secured loans to small businesses.

A report by Oxera, a consultant commissioned by small business lender Allica, found that the proposed changes would require banks to reduce their lending books if they did not increase the capital they use. UK SME lending could fall by £44bn, finds I will return the money you lent me.

Bank lending to SMEs totals around £165bn, excluding the pandemic-inspired government loan repayment scheme.

The application of the rule to existing and new lending from 2025 means challenger banks will have to cut lending “very significantly” between 2024 and 2026, according to the report. . Larger banks that calculate capital differently will be even more impacted by this change.

“SME finance is critical to the overall health of the UK economy, with SMEs being described as the UK’s ‘engine of growth’,” said Oxella. “Given the broader economic outlook for the UK and the extent to which SMEs rely on bank loans, it doesn’t seem like a good time to take risks by eliminating supportive factors for SMEs.”

If non-bank lenders increase activity or if banks choose to allocate more capital, the impact on the market will be mitigated, Oxella said.

Small Business Federation Chairman Martin McTague said the BoE proposal creates “a real risk that lending to the SME sector could become even higher, leading to lower credit availability and higher interest rates.” rice field.

“If the small business sector has more difficulty accessing credit and has to pay higher interest rates to borrow, it is likely to undermine their ability to scale and create jobs.” he added.

The National Association of Commercial Finance Brokers has asked the PRA to reconsider the change, given that many small business lenders are “small and systemically insignificant.” NACFB Chairman Paul Goodman said regulators should instead support economic growth and competitiveness by facilitating small business lending “without compromising the primary objective of ensuring financial stability.” He said that he can focus on the new second purpose of

Oxela said the proposal is also bad for lenders’ risk management. “If prudential regulation encourages banks to offer unsecured rather than secured business loans, they are unlikely to be more cautious.”

The report was shared with PRA officials, who declined to comment. The PRA is holding consultations on a proposal he submitted in December, which will end next month.

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plan to renewal UK bank capital controls could cut lending to small businesses by 25%, threatening jobs and economic growth, new research warns.The Bank of England’s prudential regulator has announced controversial plans to overhaul the capitalization of small business loans in December as part of a broader proposal to introduce the final package of Basel rules in the UK. bottom.A small part of the package includes the removal of a small business loan incentive known as the “small business support factor.” This was introduced across the EU in 2014, when the UK was still a member of the bloc, in favor of what regulators call. A more “risk-based” approach. The BoE’s proposal also contains the peculiarity that real estate secured loans are more expensive than unsecured loans due to the very high capital burden of real estate secured loans to small businesses. A report by Oxera, a consultant commissioned by small business lender Allica, found that the proposed changes would require banks to reduce their lending books if they did not increase the capital they use. UK SME lending could fall by £44bn, finds I will return the money you lent me. Bank lending to SMEs totals around £165bn, excluding the pandemic-inspired government loan repayment scheme. The application of the rule to existing and new lending from 2025 means challenger banks will have to cut lending “very significantly” between 2024 and 2026, according to the report. . Larger banks that calculate capital differently will be even more impacted by this change. “SME finance is critical to the overall health of the UK economy, with SMEs being described as the UK’s ‘engine of growth’,” said Oxella. “Given the broader economic outlook for the UK and the extent to which SMEs rely on bank loans, it doesn’t seem like a good time to take risks by eliminating supportive factors for SMEs.” If non-bank lenders increase activity or if banks choose to allocate more capital, the impact on the market will be mitigated, Oxella said. Small Business Federation Chairman Martin McTague said the BoE proposal creates “a real risk that lending to the SME sector could become even higher, leading to lower credit availability and higher interest rates.” rice field. “If the small business sector has more difficulty accessing credit and has to pay higher interest rates to borrow, it is likely to undermine their ability to scale and create jobs.” he added. The National Association of Commercial Finance Brokers has asked the PRA to reconsider the change, given that many small business lenders are “small and systemically insignificant.” NACFB Chairman Paul Goodman said regulators should instead support economic growth and competitiveness by facilitating small business lending “without compromising the primary objective of ensuring financial stability.” He said that he can focus on the new second purpose of Oxela said the proposal is also bad for lenders’ risk management. “If prudential regulation encourages banks to offer unsecured rather than secured business loans, they are unlikely to be more cautious.” The report was shared with PRA officials, who declined to comment. The PRA is holding consultations on a proposal he submitted in December, which will end next month.
https://www.ft.com/content/df202198-30b0-476c-b032-43588671ea35 BoE overhauls bank capital requirements, plans to risk £44bn in SME lending

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