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Increasing capital requirements on SME lending will stifle economic growth and depress the UK’s small business sector, business groups have warned.
Under proposals being considered by the Prudential Regulation Authority (PRA) as part of the Basel 3.1 regulations, favourable treatment for SME lending will be removed.
Removing the preferential treatment, known as the SME Supporting Factor, will force SME lenders to hold a higher level of capital against loans to the sector.
Responding to an MPs’ inquiry, the British Chamber of Commerce (BCC) said removing the SME Supporting Factor will make “credit both less accessible and more expensive for the vast majority of businesses”.
“The supporting factor has underpinned a thriving challenger bank sector in the UK and to lose or limit that now seems deeply irresponsible,” it continued.
Similarly, the Federation of Small Businesses (FSB) expressed concern that “removing the SME Supporting Factor will further disincentivise the banks and depress lending activity”.
It said there was “limited data and evidence in the consultation to support the rationale of removing the SME Supporting Factor”.
The SME Supporting Factor was introduced across the EU in the wake of the financial crisis to encourage small business lending.
While the lighter regulations are being retained in the EU, the PRA intends to tighten rules when it implements the latest round of the Basel regulations.
The BCC said its members are concerned that the PRA’s position “makes UK lenders less competitive in the international banking space”.
The Confederation of British Industry (CBI) said changing the preferential treatment may result in “certain lenders withdrawing from part or all of the market which will reduce competition”.
The business groups noted that conditions for many SMEs are as difficult now as they were back in 2008. The FSB said SME confidence is at a record low excluding the pandemic.
The groups agreed that while higher standards might attract “international recognition”, it would come at the cost of economic growth.
Harriet Baldwin MP said: “While the proposals might achieve a high level of international recognition for robust prudential standards, there is a real risk that economic growth will be the ultimate price for attaining this recognition.”
Recent research, commissioned by SME lender Allica, found that the proposed changes could result in a £44bn drop in SME lending.
The PRA is running a consultation on the proposals which closes today.