The Bank of England’s Prudential Regulation Authority (PRA) has announced a package of proposals as part of the Basel 3.1 implementation process.
The SME support factor, which allowed banks to maintain a lower capital rate to offset lending to small and medium-sized enterprises, will be removed, but the PRA will instead introduce a new SME lending adjustment which it believes will have a comparable effect in terms of supporting SME lending.
Responding to the announcement, Martin McTague, National Chair of the Federation of Small Businesses (FSB), said: “Small businesses will greet the PRA’s announcement with cautious optimism and will have high hopes that the PRA’s claim that SME lending will not be affected as a result of the changes turns out to be true.
“It is clear that the PRA has listened to the FSB and others regarding the importance of SME lending to growth and the risk to small business lending levels if the SME support factor is removed. While the factor has not been retained, the PRA says it is confident that other changes to the package will avoid an increase in capital requirements for SME lending.
“The PRA has made a significant effort to take into account the importance of small business lending; the overwhelming imperative is for the PRA to change course if, upon close scrutiny, it has got it wrong.
“The loss of the SME Support Factor with nothing to replace it would have meant that many future lending decisions would go against small businesses with the greatest potential to grow and develop, depriving them of the funds they need to expand and drive the growth we as a country need to see, so we are pleased that this argument has been successful in the PRA.
“Much more can and should be done to improve small businesses’ access to finance, particularly by reducing the disproportionate harm caused by current practices regarding personal guarantees, which have a chilling effect on entrepreneurs’ willingness to invest and take risks.”