New banking regulations are set to increase the cost of small business lending by a third, with capital requirements for banks due to rise.
Following the financial crisis in 2007-09, Basel banking regulations – an internationally agreed set of measures developed by the Basel Committee on Banking Supervision, alongside leading central banks – had been devised to strengthen oversight and risk management for financial institutions.
At the core of these regulations are requirements for banks to keep specifically mandated levels of reserve capital.
Increased liquidity requirements are in place to mitigate against a repeat of over-leveraged banks failing, as we saw in the late naughties.
Banking Regulations and Small Business Woes
The Basel regulations were introduced to make financial institutions more resilient and restore confidence in banking systems, however, experts now warn this could lead to further reductions in small business lending.
Banks will argue that growing capital requirements correspond with a fall in the overall supply of credit; something that would hit SMEs hardest.
City A.M. report that: “There are two aspects of the Prudential Regulatory Authority’s (PRA) consultation paper that have drawn attention.
“First, the PRA’s regime will cut from international standards by imposing higher collateral limits on secured business lending than unsecured business lending.
“Secondly, the PRA has not followed the EU in keeping lower capital requirements for small business lending.
“This policy was introduced in 2014 while the UK was still in the EU but it will not carry on under the latest proposals, the first since Brexit.”
Contextualising the seriousness of the situation, Richard Davies, Chief Executive of Allica Bank remarked that upcoming regulatory changes would have a “very material effect on small business lending”.
Continuing, Davies said: “We estimate the overall impact is 34% higher capital requirements”.
With many small businesses already unable to access bank loans, due to growing stipulations for personal guarantees and collateral-backed borrowing, it is thought that adoption of these new banking regulations could – in essence – render high street banks unfit to serve SMEs.
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